$5 billion windfall

Westpac’s chief economist Dominick Stephens told Dairy News dairy farmers’ revenue will be 50% up on last season; this is farm income and should not be confused with export revenue for dairy products, which is different. Dairy farmers could earn in total $12 billion.

Stephens says the $5 billion assumes the Fonterra payout remaining at $8.32/kgMS or better and milk production being up by 5%, where it is now tracking after a bumper start to spring.

The figures are based on data from Fonterra and assumptions made on other dairy companies. 

The prediction for this season contrasts sharply with that of last season when milk price and production were depressed by drought, Stephens says. The big question is what might dairy farmers do with this windfall?

“Historically the tendency is to buy more
land and convert more farms into dairy. Certainly that’s what one would expect. I think it will result in a rise in the price of dairy land and probably a greater turnover in farms.”

Stephens expects some farmers to pay debt, and others to buy new technology for their farms and make changes to improve profitability.

He doesn’t believe new environmental standards imposed by regional councils on dairy conversions will deter those wanting to invest in dairying. Prospective investors will weigh up the profitability of investments according to payouts and other factors, he says.

“There is still a fair way to go around Canterbury with the potential of land on the plains to be irrigated and converted to dairying. Irrigation can make a huge difference to land once considered unsuitable for dairying.”

But the windfall payout might be on the back of a ‘one-off’ good season, say commentators spoken to by Dairy News. There are predictions of a 2015 season payout of about $7.

And there is speculation Fonterra may be hit by large compensation claims because of the botulism scare.  Stephens concedes this could be a problem, but he believes claims will be small relative to Fonterra’s global revenue.

Craig McBeth, DairyNZ, says milk production in most regions except, notably, Southland and Northland, is well up on last season for this time of the year. But these are early days, he points out.

With the prospect of a bumper payout, McBeth is urging farmers to be cautious about splashing out on their windfall. Commodities are well known to be cyclical in price and will eventually drop from their highs for the usual reasons of supply and demand. 

Farmers must plan for the medium-long term and farm within the resources they have on their properties, McBeth says.