Thursday, August 11, 2022

Dairy should be profitable despite rising farm costs

AgFirst economist Phil Journeaux says that to the year ending March, on-farm inflationary costs on dairy farms hit 12.7%.

Waikato and Bay of Plenty dairy farmers should expect a profitable season but if the farmgate milk price falls, the “black cloud” of rising costs could spell trouble for many.

AgFirst’s annual financial survey for the two regions calculated a breakeven payout for the new season at $8.44/kg of milk solids – up from $7.75/kg MS last season and $6.49/kg MS in 2020-21.

That figure is defined as the amount needed to cover farm working expenses including debt servicing, living expenses, taxation, drawings and depreciation.

“That’s getting pretty steep. You can say that we’re getting a payout of $9.50/kg MS so who cares? That’s fine, but if that payout drops, that breakeven payout will bite you in the arse,” AgFirst agricultural economist Phil Journeaux told farmers and rural professionals at the survey’s release at the Fieldays site at Mystery Creek.

“It’s a black cloud sitting on the horizon.”

The survey looks at 25 farms throughout Waikato and Bay of Plenty and was completed in June for the financial year just finished.

A model farm and budget are then created based on the results, which represents the 3900 dairy farms across the two regions.

The model farm is 133ha, milking 368 cows at 135,000-145,000kg milk solids for the season. The breakeven payout is then calculated from that model.

The increase in farm working expenses is growing 1.5% faster than the increase in net farm income.

“In the fullness of time, that is not sustainable and the only thing that can pull that back is an increase in payout or an improvement in-farm productivity.”

The biggest cost for farmers is supplementary feed, while fertiliser and labour costs were also creeping up. 

Much of those expenses have occurred in the past six months, which will mean a full season of those increase in costs for the current season. 

From a kilo of milk solids perspective, those costs have jumped from $4.39 two years ago to $5.32 for the season just ended and are budgeted at $5.95/kg MS fo this coming season.

The on-farm cost of inflation on dairy farms is also running twice the level of the consumer price index (CPI). 

It was a major issue for New Zealand’s farming systems and its international competitiveness.

Despite the risks, the farm model was still operating profitably,and was heading into the season in a reasonable financial position, Journeaux said.

Many were still recovering from the drought and were still short of feed, with pastures averaging about 1800kg dry matter a hectare when farmers required closer to 2000kg DM/ha.

Read: Full impact of costs yet to hit farming

The model assumed a $9.50/kg MS payout for the season, which should see a good cash surplus.

“All things being equal, provided the payout comes through, the farm and the monitored farms should be operating quite profitably this season. Sure, farm working expenses have gone up, but we have been able to cover those.”

Journeaux said cost increases aside, there were ongoing concerns from the monitored farms about labour shortages and new environmental regulations.

Using He Waka Eke Noa pricing, the estimated greenhouse gas levy for the model farm in 2025 was $5817 and $18,580 in 2030.

Bobby calves continued to be an issue and Journeaux believed a ban on their killing was not a question of if, but when.

“In the fullness of time I believe the killing of bobby calves will be banned full stop. When that happens – not if – it will absolutely revolutionise the beef industry.”

This is because the estimated two million bobby calves being killed will have to be reared.

“I pose this question, where the hell are they going to go?”

All this saw mixed morale from the farms being monitored and a belief that they had little control over their destiny, he said.

“They are concentrating on the day-to-day issues but there are these happening and they are not sure where life is headed in the next five to 10 years.”

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