DairyNZ: Strong payouts offset high farm costs
The dairy sector is in a relatively stable position, with strong milk price payout forecasts continuing to offset ongoing high farm costs, according to DairyNZ.
While farm input inflation is receding, the lower milk price remains the dominating factor on many farms.
Penny says for many farmers, this season's milk price is likely to be below their break-even point.
"Indeed, even after taking account of the cost-cutting measures that farmers are likely to take, DairyNZ's updated milk price estimate is around $7.50/kg," he says.
Break-even estimates vary widely by farm - and in the calculation method - so that some farms may have larger deficits, while some may still even be in surplus.
However, there are some offsets in play, notes Penny.
"The recent payout from the sale of Fonterra's sale of its Chilean business has added $0.50/kgMS back into Fonterra farmers' cashflows, at least, if not their farm profits.
"Also, Fonterra is set to pay a relatively healthy dividend in October of circa 40c/share.
"The other potential source of relief is falling on-farm inflation. Annual dairy farm input inflation was running as hot as 17% in the middle of last year. Now as at the June 2023, annual input inflation has fallen to 7% - by the end of the year, we expect to fall to the 3% to 4% range.
"If anything, given the pace of declines to date and subsequent feed and fertiliser price reductions, input inflation could be close to flat by the end of 2023. Those factors aside, the lower milk price is still the dominating factor. Indeed, improvements in farm profit margins are likely to need to wait until the 2024/25 season. For this season, it means that for many farmers the focus is likely to be on loss minimisation."
ANZ agri economist Susan Kilsby agrees that the breakeven point varies from farm to farm, but achieving a profit will require careful cost management and efficient expenditure relative to production, and for many farmers, will be beyond reach even then.
She points out that dairy markets typically go through these cycles, but focusing on what can be done, asking for assistance from advisors and keeping cashflow forecasts updated will be imperative.
Dairy farmers across the globe will be finding the current environment challenging, she says.
"New Zealand does have greater volatility in farmgate milk prices than most other countries due to its higher exposure to global markets.
"Domestic prices tend to be more stable, and in countries with large domestic markets such as the US, Europe and to a lesser extent Australia, domestic sales buffer exporters to some degree against fluctuations in farmgate prices.
"But New Zealand farmers can generally produce milk more cheaply than in those countries. The low prices will mean global milk production eases, which will help rebalance the market, although not quickly."
