It's The Margins That Matter
OPINION: It appears to be difficult for people who haven’t tried to run a business to understand the difference between assets and cash.
Despite the Fonterra forecast farmgate milk price easing to a midpoint of $9.50/kgMS, the overall outlook remains positive with a forecast breakeven milk price of $8.50/kgMS.
DairyNZ head of economics, Mark Storey, says the sector remains optimistic, but farms should continue to monitor costs heading into the new year, as increased global milk supply has put downward pressure on dairy commodity prices.
“It’s not a case of being the Grinch who stole Christmas, but we do need to be sensible in terms of on-farm spending to maintain profitability over the remainder of the season,” he says.
“Demand is steady but not strong enough to absorb the additional milk at previous price levels. At the same time, we’re seeing a seasonal increase in farm working expenses – up 16c to $5.83/kgMS, which consequently influences breakeven costs and cash surplus.
“Even with a softer outlook, the sector remains in a strong position by historical standards: demand is stable, export volumes are firm, and New Zealand maintains a competitive edge in global markets.”
National milk production to date is up 3.4% on last season. The South Island is leading the charge, posting a 5.7% lift in October, predominantly driven by extra feed. It remains to be seen whether damage to irrigators and pasture from the storms in October will influence South Island production for the remainder of the season.
DairyNZ chair Tracy Brown says that farmers are keeping a close eye on interest rates, and any further reductions will be welcomed by the sector.
“As many of my fellow farmers would agree, anything that helps ease the cost pressures is always appreciated. This update indicates that interest payments are expected to reduce to $1.11/kgMS for 2025-26, which is 35c lower than last season. Farms that reduce debt during high-payout years are better placed as margins tighten,” she says.
“With the end of the calendar year upon us, it’s a good chance to review budgets and the drivers of increasing farm working expenses, particularly feed and fertiliser, and see where improvements can be made. Small gains in strengthening farm systems can help drive productivity over the season and overall farm resilience.”
