Lock in gains, farmers urged

Dr Tim Mackle

With potential for a breakeven season ahead for more dairy farmers, analysts are urging them to maintain cost savings and keep on top of debt repayment.

Fonterra's recent forecast 50c increase to $5.25 per kg of milk solids for the 2016-17 season was "terrific news", DairyNZ chief executive Tim Mackle said, but he cautioned farmers to lock in gains achieved during the past two seasons.

"This brings many farm businesses to around the 2016-17 breakeven milk price of $5.05 per kg milk solids, once retrospective payments and dividends are taken into account.

"This means fewer farmers will need to borrow extra funds this season," he said.

ASB senior rural economist Nathan Penny said that at first glance, the numbers in Fonterra's full-year result were all very positive, "but in short, they needed to be" given the previous season was "plainly, poor".

"In that context, it is not the turnaround in this year's results that will shed light on Fonterra's performance and strategy.

"Instead, it is what happens from here that matters," Mr Penny said in a statement.

He said looking ahead, the signs were positive so far and Fonterra had signalled further improvements were likely over 2016-17, but a lot could happen between now and the end of the current financial year.

Mr Mackle said many farms had developed a disciplined approach to their farm system, having reduced costs and maximised the amount of pasture eaten during the past two seasons, he said.

"Now is the time to continue that focus and regain some lost income."

While Fonterra had posted a 65% increase in after-tax profits to $834 million for last season, it had boosted farmers' dividend payments by 60%.

Mr Penny said on the future milk price he was "more confident" of a lift, and maintained ASB's forecast of $6 per kilogram of milk solids for 2016-17.

Mr Mackle said for next year, retrospective payments had also been boosted by 20c-25c to more than $1 per kg of milk solids.

"Farmers will therefore look at the advance rates and test the effect on their cash-flow budget. Winter 2017 will look more promising as the retrospective payments come through," he said.

Because of the successive cash losses, most farmers had added to existing debt.

"It's crucial they keep a focus on generating cash to pay that back," Mr Mackle said.

He said making maximum use of pasture was key to any farm's profitability and with the forecast price increase it was important to lock in gains made during the past two seasons.