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DairyNZ says the latest drop in Fonterra's forecast farmgate milk price for the 2014-15 season is a signal to farmers to reassess the costs of their farm system.
DairyNZ's general manager of research and development, David McCall, says most farmers should cope with lower prices this season, provided another drought doesn't hit the country. However, around a quarter of the country's farmers, those with a lot of debt, may have difficulty meeting their farm working expenses and interest payments.
"Our real concern is maintaining profitability across the industry if milk prices remain low for the 2015-16 season," he says.
Fonterra has reduced its forecast farmgate milk price for the 2014-15 season from $6.00 to $5.30/kgMS. It also increased and widened the estimated dividend range from 20-25 cents per share to 25-35 cents – amounting to a forecast cash payout of $5.55-$5.65 for the current season.
The co-op also announced a final payout of $8.50/kgMS (comprising milk price of $8.40/kgMS and dividend of 10c/share) for last season.
McCall says last season's high milk prices will deliver a significant deferred payment to farmers into the 2014-15 season, which will bolster low milk prices this season.
"We expect farmers to make a determined effort to control farm working expenses this season, with an average budgeted reduction in farm working expenses of around 40c/kgMS to $4/kgMS. That will affect regional economies and communities the most. We estimate just over a $1 billion loss of income for farmers based on comparisons with the 2013-14 season's production," he says.
"Our surveys show that farmers will reduce their spending on bought-in supplementary feed, fertiliser and repairs and maintenance, which all increased in 2013-14."
McCall says the focus for DairyNZ isn't just about getting farmers through this season.
"We will be urging them to think about the next five years – are they running profitable farming systems that can survive fluctuating long-term trends in payout?
"Our analysis shows we are just within the long-term bounds of the trends for average dairy company total payouts – and if you can't survive those, then you need to look at your farm system and what to change.
"We know there are dairy farmers who operate low-cost farming systems that are able to make a profit with a $5 farmgate milk price. There are lessons from their experience for our industry.
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