Tuesday, 12 May 2015 09:48

Low payout ‘starting to hit home’

Written by 
Wade Bell, DairyNZ Wade Bell, DairyNZ

A crisis looms in the dairy industry as the implications of the $4.50 payout starts to hit home.

DairyNZ says its modelling shows that for the coming season the vast majority of dairy farmers will have to live in overdraft for the entire twelve months from June 1, 2015 to May 30, 2016 and possibly longer. 

Wade Bell, DairyNZ regional leader, says the drop from a payout of $8.50 to $4.50 is massive, so his organisation is focusing on helping farmers sort out their cashflows, as posted on its website. Bell says they have done an ‘average’ cashflow for owner operators and sharemilkers for the next 12 months and the news is not good. 

“You would normally expect farmers to be into overdraft by October-November and come out of overdraft early in the new year. But looking at the cashflows this year, not many, if any, will come out of overdraft for the entire season. This depends a little on what figure Fonterra sets for the payout next season but based on where we think things are at the moment, including the GDT, there is nothing to indicate the year will be exceptional. Maybe a few will have positive balances but the majority will still be in overdraft this time next year.”

Bell says this is based on the proposition that the average cost structure on a dairy farm is about $4.30/kgMS. But he says if a farmer has an average level of debt of about $20.00/kgMS that will add another  $1.20 of debt servicing, putting the cost up to $5.50/kgMS. Even if farmers can trim their costs they will still need $5.00/kgMS or slightly more to break even.

“This is just to pay the farm working expenses and interest – there are no living expenses or anything else. It’s a crisis and that’s why a lot of commentators are saying farmers can possibly manage one year with the banks being supportive. But if it goes beyond that it would become a major concern. This is a very serious situation and it will obviously have flow-on effects into the wider community and the nation as a whole.”

Bell says it’s hard to tell whether dairy farmers on high input systems are more vulnerable than those on low input systems. But he says it’s well known that farm profit is closely linked to farm working expenses and what typically happens is that higher input systems have higher farm working expenses. It’s likely that those on high input systems will respond to the lower payout by cutting out expensive items and perhaps changing their type of feed to cut costs, Bell says.

“But there is a limit to what they can do given the infrastructure they have, the stocking rates and the machinery they own. But I don’t think we are going to see farmers chop and change from one system to another. Irrespective of the system a farmer is running, if he has a high cost structure he is very vulnerable at the moment.”

Cashflows will be tight

ASB's Rural economist Nathan Penny agrees with DairyNZ’s view that cashflows for dairy farmers over the next year will be ‘pretty tight’. And he predicts Fonterra will initially pitch next season’s forecast payout low. Some farmers may have to exit the industry if low returns persist, he says.

“This season the one group doing it tough will be those new to the sector. If you have come into the sector in the last year you’re going to be struggling. The same will apply to those who run higher debt or are higher leveraged than the sector average. The one counter to that is that interest rates are very low and have the potential to drift even lower over the next year or so.”

Penny says farmers are already cutting spending onfarm and looking at things they can control like fertiliser spend, feed, maintenance and capital expenditure. 

“Obviously that has implications for the wider rural sector and we expect to see less activity in the rural supply businesses around the country. We also expect land prices to reflect that. They came off the boil towards the end of last year and we expect that to continue into this year.”

Penny says retail sales in rural areas are likely to be “softer” as the spending power of dairy farmers declines. This has implications for the whole country: lower export receipts and tax take.   

“Finance minister Bill English has announced they will not hit their surplus target in this fiscal year. And the dairy story is part of, but not the only reason for tax revenue being down $4.5 billion over the next five years. So it does have wide implications and we are expecting a tough period ahead for the sector as whole.”

Penny says he believes many farmers paid off a lot of debt when the payout was $8.50 and that they were “restrained” in their spending. He says ASB will work with farmers to manage cashflows, set budgets and discuss their requirements.    

“Our medium and long term view of the dairy sector is very positive. This is based on emerging markets’ demand for protein and the growing incomes in those countries. We see this as a long term positive story. We don’t think anything has changed there so in that regard it’s about managing proactively with farmers over the next 12-18 months.”

Penny says the present situation is quite similar to what happened when there was a good payout in 2008, then a huge drop in the following year then a price recovery.

More like this

Mixed legacy

OPINION: You're never as good as when you're dead, and with due respect to Theo Spierings' family, the Hound can't let the death of the former Fonterra CEO pass without mentioning the parlous state he left Fonterra in when he exited in 2018 - having pocketed well north of $30 million over seven years.

Musical chairs

OPINION: DairyNZ's director elections has seen scientist Jacqueline Rowarth re-elected for another three-year term.

Featured

New ag degrees at Massey

Changing skill demands and new job opportunities in the primary sector have prompted Massey University to create a new degree course and add a significant major into another in 2025.

The show is on!

It was bringing in a new Canterbury A&P Association (CAPA) show board, more in tune with the CAPA general committee, that has ensured that Christchurch will have a show this year, says CAPA general committee president Bryce Murray.

National

'Quite a journey'

Former Synlait chief executive Grant Watson says the past two years have been quite the journey.

DairyNZ levy to increase?

Retiring chair Jim van der Poel has used his final AGM to announce the intention to increase the DairyNZ farmer…

Former Fonterra CEO dies

Former Fonterra chief executive Theo Spierings passed away in the Netherlands over the weekend.

Machinery & Products

Milk Sustainability Centre launched

The recently announced Milk Sustainability Centre – a collaboration between global giant John Deere and milking and feed specialists De…

Data connection made easier

New Holland and Case IH are introducing new advancements in their precision technology stack to make farming easier and more…

» Latest Print Issues Online

Milking It

Feed from farmers

OPINION: The country's dairy farmers will now also have a hand in providing free lunch for schools.

Brighter future

OPINION: The abrupt departure of Synlait chief executive Grant Watson could be a sign that Chinese company Bright Dairy, the…

» Connect with Dairy News

» eNewsletter

Subscribe to our weekly newsletter