Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
But another positive is also emerging – New Zealand dairy farmers have sharpened their systems and reduced costs through this sustained low milk price period.
DairyNZ chief executive Tim Mackle says while the milk price will continue to keep pressure on farmers this season, the industry's performance in cost-cutting on-farm means break-even costs have been reduced.
"We've revised our break-even milk income required for the average farmer in 2016/17 to $5.05/kgMS," says Mackle. "It was $5.25/kgMS for 2015/16 and $5.77 in 2014/15."
The break-even cash price includes farm working expenses (excluding adjustments for unpaid management and depreciation), interest and rent, tax and drawings; and nets off livestock and other income received.
"The reduced milk price has meant farmers have really fine-tuned their management and analysed their costs of production. This should bring the average farm working expenses back to an anticipated $3.55/kgMS this season, the lowest level since 2009/10."
Farm working expenses were sitting at $4.07/kgMS in 2014/15, so the reduction has been equivalent to around $100,000 per farm, on average.
Mackle says reducing the break-even price is tremendous recognition for New Zealand dairy farmers and the resilience they have shown.
"Being able to reduce the break-even milk price tells us that dairy farmers have cut costs further than we thought. This cost control is resulting in more efficient dairy businesses, which is key to resilience."
Despite the $5.05/kgMS break-even milk income required for the average farmer, under the current forecast farmers will receive around $4.50/kgMS all up in terms of milk income, including retro payments from last season and dividends (including the lift in dividend announced yesterday).
"Obviously there is still a shortfall there – and while there are farmers operating above that $5.05 level, there are many with break-even incomes below that too. But a $4.50 income and reduced farm working expenses means farmers won't need to borrow quite as much," says Mackle. "But let's be clear, this is still very tough for our farmers as it's been a sustained period of low milk price.
"Every farm runs a slightly different system, with different costs and needs. Many will have been through the process of fine-tuning their budgets, but maintaining that momentum and always looking for efficiency opportunities is key."
