Reserve Bank says falling dairy prices, rising costs, are eating into farm profits

Falling dairy pries and rising costs are a concern, the Reserve Bank says. Photo / File

The Reserve Bank says falling dairy prices and rising costs are putting pressure on farmers’ profit margins.

The bank, in its latest Financial Stability Report, also singled out increasing farm debt servicing costs as a concern.

“In the agriculture sector, falling dairy prices over the last six months alongside increasing farm input costs, such as those of fuel, fertilisers, and labour, are putting pressure on profit margins,” the bank said.

Fonterra is now projecting a reduced midpoint price of $8.30 per kilogram of milk solids (kgMS) this season, which ends on May 31, driven by the slowing global demand, particularly from the Chinese market.

“Another significant concern for the dairy sector is increasing debt servicing costs,” the central bank said.

At an aggregate level, average interest costs per unit of production increased to $1.20 per kgMS from $0.50 per kgMS in mid-2021, it said.

Narrowing margins from rising costs and falling international dairy prices have led to more requests from farmers for working capital and overdrafts to meet short-term cashflow needs.

While dairy prices have fallen, the latest price action on the Global Dairy Trade platform shows prices may be about to turn.

In April, Fonterra cut its 2022/23 season forecast to a range of $8.00 to $8.60 per kilo of milk solids, reducing the midpoint of the range by 20 cents $8.30/kg, and down from the record $9.30/kg paid in the 2021/22 season.

Westpac senior agri economist Nathan Penny has said recent price weakness would be temporary.

He is sticking with the bank’s “healthy” 2023/24 milk price forecast of $10.00/kg.

Penny said this morning’s Global Dairy Trade auction, which saw prices jump by 2.5 per cent, helped to reaffirm the outlook.

“Coming late in the season, the result also doesn’t change the outlook for this season’s milk price,” he said.

“It is, however, a step in the right direction for our positive outlook for next season, albeit it is still very early days.”

Penny expects Chinese demand will lift global dairy prices and very subdued global milk supply will provide additional support for prices.

In its commentary, the Reserve Bank said New Zealand’s financial system is well-placed to handle the higher interest rate environment and international financial disruptions.

New Zealand households are facing increased debt servicing costs as their borrowing reprices to higher interest rates, Governor Adrian Orr said.

“To date, there have been limited signs of distress in banks’ lending portfolios, with only a small share of borrowers falling behind on their payments.

“This reflects the ongoing strength of the labour market and that borrowers have been able to adjust their spending or use previous savings and repayment buffers.

“That said, cash flow pressures among households and in some business sectors are growing.”

Unlike previous Financial Stability Reports, particularly those issued around the time of the 2014-16 price slump, the Reserve Bank has not specifically singled out dairy as a risk to the financial system.

Even so, Federated Farmers national president Andrew Hoggard said many dairy farmers would be struggling to break even with the milk price at $8.30 a kg.

“I don’t disagree with anything the Reserve Bank has said there,” Hoggard told the Herald.

“People are definitely feeling the pinch with dairy prices coming back.

“We have seen a little bit of movement in terms of fertiliser prices, but interest rate costs are well and truly up.”

While the latest data had consumer price inflation running at 6.7 per cent, Hoggard said on-farm inflation was running at about double that.

“There will be people making a loss this year at $8.30 a kg, with the way costs have gone, particularly if they have higher borrowings.”

However, the situation was not as dire as it was during the milk price slump, Hoggard said.

“Thankfully, we are nowhere near as bad as that, but it is still enough to make you pay attention to your budget.”