Dairy boom: Economy in line for $10 billion boost if farmgate milk price stays high

Another $10/kg milk price payout in 2025/26 will provide a boost to the economy, DairyNZ says. Photo / Christine Cornege

DairyNZ says the 2025/26 season could be one for the history books if farmgate milk prices stay around $10 per kg of milksolids (kgMS) for the second time in a row.

If that pans out, dairy’s contribution to the economy would increase by about $10 billion over two years, compared to previous, more moderate milk price outcomes of around $8.50/kg.

Over the past 25 years, seasons of record payouts to farmers have tended to be followed by a significant drop in the payout the following season.

In the 2013/14 season, Fonterra paid $8.40/kg – a record at the time – but prices slumped to $4.40/kg in 2014/15, then further still to $3.90 in 2015/16, with devastating effect.

This time, initial insights indicate that farmers could see two robust payout seasons in a row, DairyNZ head of economics Mark Storey says.

“From our back-of-the-envelope calculation, the added value to the economy of a $10 [per kilo] payout would be worth $4.9 billion annually, so over two years, just under $10 billion,” Storey told the Herald.

That extra money pumped into the economy would equate to 2.3% of GDP, going on Stats NZ’s latest data.

“It’s about what a mid-sized economic stimulus package would deliver, so it’s a lot of money,” Storey said.

“It’s a massive contribution to the economy,” he said, adding the extra spending going into the regions would have a multiplying effect on the rural economy.

DairyNZ’s forecast for the 25/26 season – $10.13/kgMS – looks similar to the current season’s, which ends on May 31.

With farm working expenses sitting at $5.94/kgMS, DairyNZ has calculated a break-even milk price of $8.57/kgMS for next season.

Storey says international supply and demand appear to be in good balance.

Expenses persist

“It is important to highlight, however, that we are seeing high farm working expenses persist for a variety of reasons, leading to a relatively high break-even milk price.

“While we have seen on-farm inflation cool off and input costs per unit remain relatively stable, there have been some minor increases in areas like electricity.

“However, a factor driving these continued high expenses is an expected uptick in inputs such as feed and fertiliser as farmers in part respond to a positive milk price and in part rebalance reductions made in input use during the high price inflation experienced in recent seasons.”

Interest rates are also expected to continue to fall.

The impact of lower rates would come into effect for many farmers next season as they come off fixed-term lending, which would offer some financial relief.

DairyNZ’s outlook for 2025/26 comes with the usual qualifications.

“All forecasts made at the beginning of the season come with a strong caveat – a lot can and often does change throughout a season, as costs and returns to dairy are in many cases driven by international factors well outside the individual farmer’s control,” Storey said.

“The international geopolitical context is hard to predict and there are significant external risks that could impact profitability.”

Fonterra had forecast a $10/kg milk price for the current season. Photo / Bruce Jarvis

A volatile operating environment in world commodity markets – driven by trade tariff tensions, exchange rate fluctuations and the increasing risk of a US recession – added uncertainty to global dairy prices.

“Despite this uncertainty, we do the best forecast we can with the information available and right now we are seeing strong market fundamental indicators that, for the first time in 25 years, show there is a good chance we will see two $10 payouts in a row, rather than a peak followed by an immediate trough,” Storey said.

Farmers needed to use the payout to prepare for whatever comes next in case market conditions change, he said.

Storey encouraged farmers to take advantage of the current strong payout by maintaining healthy cash reserves and reducing debt where possible.

He said farmers had been reducing their debt, which had led the debt-to-asset ratio to be the lowest it has been in the past 10 years.

Current season

On the current 2024/25 season, Storey said the positive changes seen early into the new season had continued.

This season has seen a significant boost in profitability for the sector compared to that initially expected back in June, he said.

“As the season progressed, we saw successive positive outcomes in international dairy auction results that were in turn reflected in improved farmgate milk prices, meaning that the season has shaped up to be a relatively high payout season.

“After a few years of high costs and inflation having big impacts on the bottom line, this is a relief for farmers and they will be optimistic this continues into next season.”

Storey noted many farmers were dealing with drought conditions across several regions.

Dairy giant Fonterra has upgraded its earnings forecast for the current financial year to 55-75c from a previous forecast of 40-60c.

The mid-point of Fonterra’s current milk price range is $10.00/kg.

The co-op usually releases its milk-price forecast for the ensuing season with its third-quarter update, due in late May.

Fonterra is due to release its first-half result on Thursday.

Outside of dairy, Rabobank said improved sentiment among sheep and beef farmers had helped drive a third consecutive lift in New Zealand farmer confidence, according to its latest survey.

Following a big jump in the last quarter of 2024, farmer confidence in the broader agri economy had risen again, with the net confidence reading now sitting at plus 44% (from +34%).

This was the second-highest net reading recorded across the past decade, with only the quarter-two reading in 2017 (+52%) higher, the bank said.

Rabobank general manager for country banking Bruce Weir said the uplift in confidence in the broader agri economy had been driven by improved sentiment among the country’s sheep and beef farmers.

“In our last survey late last year, we saw a big jump in dairy farmers’ confidence in the agri economy off the back of improved expectations for the 24/25 milk price forecast and, this time around, it’s their counterparts in the sheep and beef sector who have recorded a big uplift,” he said.

Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.