Dairy prices down as are costs
Dairy prices are easing but cost inflation is down across the board, providing some relief to farmers.
However, Westpac senior agri economist Nathan Penny claims the dairy sector is well-placed to manage through this milk price cycle. He says farm balance sheets remain strong, with many farmers having experienced downturns before so have the tools to weather the storm.
Penny concedes that many farmers are doing it tough and this season's milk price is likely to be below their breakeven point. He says a "back of the envelope" calculation, with total operating expenses of $6.80/kgMS and debt servicing costs of $1.50/kg, would put farmers' total outgoings at $8.30/kgMS.
Last week, Westpac slashed its forecast milk price by $1.10 to $7.80/kgMS. Fonterra's current forecast milk price range is $7.25 to $8.75/kgMS.
Penny points out that breakeven estimates vary widely by farm, with some farms having larger deficits while others may still even be in surplus.
"That said, farm balance sheets are generally strong. With that in mind, plus the experience gained during previous downturns, we expect that farmers are well placed to manage through this milk price cycle."
Penny expects Fonterra to lower its forecast range in August.
ANZ recently dropped its forecast milk price by 50c to $7.75/kgMS. The bank's agri economist Susan Kilsby believes that prices will not materially increase before a large proportion of the current season's supply is traded.
"What is clear is that consumer demand is being impacted by weaker economic conditions in many regions," she says.
"Most economies are still growing, albeit at a considerably slower pace than normal, which is taking a toll on dairy demand."
Kilsby expects the Chinese market to remain relatively weak for some time yet. However, she believes that as milk supplies tighten, prices should improve later in the season.
ASB is sticking to its forecast milk price of $7.25/kgMS and warns that a rapid recovery in Chinese demand looks unlikely, with the latest economic data continuing to underperform.
One of the biggest impacts on dairy farm profitability is rising interest rates. Farmers, re-fixing their mortgages, are facing huge rises in financing costs.
Federated Farmers dairy chair Richard McIntyre claims that some farmers ae taking on additional work off farm to keep up with rising interest costs. He points out that while the price of some farm inputs such as fertiliser, fuel, and palm kernel expeller (PKE) are starting to ease, there is still a lot of stress amongst farmers, particularly those with higher levels of debt.
"Many have come off fixed interest rates and the significantly higher interest payments are really starting to bite," he told Rural News.
McIntyre warns that any drop in the milk price will exacerbate the problem.
