Fonterra dairy farmers are in line for their creamiest milk payment ever, but with interest rates and inflation worryingly on the rise and spiralling farm and household costs, don't expect them to spend up large, says an industry economist.
Dairying stronghold the Waikato region would benefit by $780 million, Canterbury by $820m and Southland by $480m if the midpoint $8.40 per kg milksolids of Fonterra's latest forecast farmgate milk price range for the current season plays out, says DairyNZ principal economist Graeme Doole.
This midpoint, off which dairy farmers are paid for their milk, would equal the highest milk price paid by New Zealand's biggest business, and mean a total $13 billion flow into the country's regional economies next year, Fonterra said.
The farmer-owned co-operative this week increased and narrowed its farmgate milk price range to $7.90-$8.90/kg from $7.25-$8.75. This means the new mid-point forecast lifts from $8/kg to $8.40.
Doole said the forecast suggests Fonterra farmers are looking at their second highest level of profit in the past decade as demand for dairy in global markets outstrips supply.
But with farm cost structures changing, interest rates rising to counter inflation pressures, and farmers, like all New Zealanders, affected by pandemic-fuelled rising food prices and costs, there were plenty of counters to the strong payout prospect.
Dairy farm costs had increased 5 per cent in the last quarter alone, Doole said.
"Global food prices have increased dramatically. The Food and Agriculture Organisation food price index is up by a third. Expenses are rising really fast as well."
Doole said the cost of farm staple urea had risen by two-thirds reflecting source access challenges during Covid, higher processing and shipping costs and the cargo space squeeze, while the price of super phosphate had gone up by 15 per cent in the past year.
Farmers were also affected by fuel price rises.
"There's a really positive story around milk price but we're starting the uptick on the other side."
Doole said typically, farmers put half their milk price into farm operating expenses and standard household living costs. Expenses included farm support service costs like vets and fertiliser.
Debt repayment took another chunk. This was an area of concern for farmers now with rising interest rates. Dairy farmers had succeeded in paying down a lot of debt in the past two years but the sector still owed $38b.
"Farmers will have to continue paying down debt and being prudent given all the uncertainties."
On the positive side, there were indications milk prices could be more stable than in the past as strong demand continued, Doole said.
"The big concern for us is interest rates."
Another looming drain on farmer pockets was yet-to-be-defined environmental compliance costs. Farm labour costs were tipped by some observers to increase by $20,000 a year, due to the shortage of overseas workers and anticipated Government policy change.
Fonterra CEO Miles Hurrell says the lift in the 2021/22 forecast Farmgate Milk Price range is a result of continued demand for New Zealand dairy relative to supply.
"At a $8.40 midpoint, this would equal the highest Farmgate Milk Price paid by the co-op, and would see almost $13b flow into regional New Zealand through milk price payments this season."