Analysts warn golden milk price may drop as costs rise for dairy farmers

Dairy analysts are pointing to less milk going through domestic and global milk processing plants such as Fonterra's Darfield operation because of growth limits. Photo / Tim Cronshaw

The gloss of two $9-plus payouts for dairy farmers is being robbed by rising farm costs and a build-up of environmental changes.

A record starting point for a payout of $9 a kilogram of milk solids is being advanced for the 2022/23 dairy season by dairy giant Fonterra and Canterbury-based Synlait Milk.

This follows Fonterra's forecast range of $9.10/kg to $9.50/kg for this season, with a mid-point of $9.30/kg, that's being matched by Synlait.

Analysts cautiously support the new-season mark despite a mixed bag at the Global Dairy Trade auction and a hazy horizon created by Covid-19, freighting headaches, Ukraine's invasion by Russia and rampant inflation.

Farmers are watching price lists go up for fertiliser, fuel, agri-chemicals, wages, animal feed and health products, power and winter grazing.

Federated Farmers Dairy North Canterbury chairman Karl Dean said the high payouts were needed to counter the inflationary pressures on farming.

He said rising fuel prices were a real concern with tractors costing $1000 to fill and this was pushing farm inflation close to 1980s levels.

"The skyrocketing price of fuel ... affects every single thing on a farm in terms of expenses. Contractors will have to pass on their costs and it affects every single freighted item."

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He said the way prices were rising it was possible that a $12/kg price could go on the table, but a drop to $8/kg would be more devastating than in 2014-15 when it went $4.40/kg from $8.40 the year before.

He said that's purely because every cost had increased.

"I have heard anything up to 15 per cent to 18 per cent for general inflation of costs on a dairy farm and that's for the season just finished. If fuel prices go up from $3 a litre to what have you then on-farm inflation will rise even more."

Last week the futures market had milk prices at $10.40/kg for the 2022-23 season.

Dean said farmers felt sorry for people who weren't getting wage increases to match the extra prices they had to pay for goods.

If a recession hit in the next year the Government would be forced to place its recommendations for many environmental rules on the back-burner, he said.

Rabobank is still flagging $9/kg for next season's milk price, with the proviso that this could easily swing either way.

The bank expects prices for dairy commodities will drop moderately in the second half of the year because of weakening demand, even though global milk supply is continuing to wane.

Federated Farmers North Canterbury dairy chairman Karl Dean is worried about rising costs. Photo / Federated Farmers

Milk production across the Big Seven dairy producers of Argentina, Brazil, Uruguay, EU, UK, New Zealand and Australia is expected to retreat for a fourth consecutive quarter.

Rabobank senior analyst Emma Higgins said the slowdown was because of higher production costs and weather events.

"Now there are structural issues that could limit a significant rebound in production from some key exporters.

"Dairy herds in New Zealand and Europe have limited scope for growth and are more likely to contract under current and proposed regulations and environmental pressures."

South American farmers faced competition from grains and oilseeds for land and around the globe higher corn and soybean prices were hurting.

Higgins said inflation pressures in energy, fuel, and wages were impacting profitability.

She said the expected weak milk growth was likely to be met by lower dairy demand over the coming months, as consumers felt the impact of inflation on their purchasing power.

Inflation in the US and the EU is at a 40-year high.

"Weakening consumer purchasing power is making it difficult for milk processors to pass increased production costs on to consumers."

Rabobank senior analyst Emma Higgins warns the payout forecast for could go up or down. Photo / Rabobank

New Zealand and other dairy farmers were also juggling higher cost pressures.

Fuel, fertiliser, feed, and labour were likely to remain elevated into 2023, she said.

Higgins said the bank's forecast for the new season payout remained unchanged, but there were many upside and down-side factors from heightened uncertainty.

It's not all gloom with MPI's Situation and Outlook for Primary Industries report projecting the dairy sector will be worth $21.6 billion this year and heading towards $24 billion by 2026.

DairyNZ chief executive Dr Tim Mackle said farmers would take heart from this.

"Farmers really are being challenged right now. Input costs and staff shortages are testing our farmers as we head into the busiest part of the year when the impacts of stress will be felt the most. Farmers are also delivering on environmental work and implementing policy changes on farms too."