Fonterra’s reduction of its milk (miraka) price forecast for this season has reduced the difference between profit and loss for dairy farmers to a razor-thin margin.
The co-operative recently reduced and narrowed its 2022/23 season forecast milk price from $8.50-$9.50/kg MS with a midpoint of $9/kg MS to $8.20-$8.80/kg MS with a midpoint of $8.50.
Going by data from farm consultancy AgFirst’s 2022 financial survey of Waikato and Bay of Plenty farms, that new midpoint sits just above the survey’s break-even figure of $8.44/kg MS.
Similarly, DairyBase figures from 130 Waikato farms compiled by DairyNZ show a break-even milk price of $8.68/kg MS.
Farm costs tend to follow some way behind the milk price when the forecast lifts or falls. This is happening right now, but labour and interest rates are still high, Federated Farmers dairy chair Richard McIntyre said.
“There’s generally a lag between when the payout goes up and farm working expenses go up – so farmers typically make a lot of money during those times and that’s what we have seen.
“But when the milk price goes down, expenses often take time to go down as well for various reasons.”
The biggest pressures for farmers at the moment are interest rates and labour costs. The median wage has increased to $29.66 and farmers using migrant labour will have to pay that hourly rate, he said.
“So, $8.50/kg MS is now roughly in line with the break-even milk price and there will be farmers that are still cashflow positive but there will also be farmers that are cashflow negative.”
Farmers produced milk this season and made spending decisions on the assumption that the milk price would be higher than it currently is.
There is little farmers can do for this season with the bulk of that spending paid out.
However, farmers are starting to compile budgets for their bank managers for next season and those budgets and systems need to be reviewed to ensure they are as efficient as possible, he said.
“We hope for the best and plan for the worst. I hope $8.50/kg MS is what next season is as well but there’s a chance it could be worse and we need to ensure we are as efficient as possible to so we don’t get to this time next year and get told that the milk price is $6.50/kg MS.”
McIntyre said that with incomes and costs tightening, farmers will also keep a closer eye on Fonterra’s spending.
“There will be greater scrutiny on Fonterra. We have had a few good years, and everyone’s been happy with Fonterra and the direction they are going, whereas now I think there’s going to be a heightened level of scrutiny and making sure there’s no wasteful spending or opportunities missed.”
DairyNZ solutions and development advisor Paul Bird said the forecast downgrade means incomes will be down, depending on where the final payout ends up.
“Revenue is going to be down and the inflation impact is still coming at us and we have a double whammy. If you look at farm working expenses, we estimate they could be around $6.40/kg MS – up from $5.46/kg MS last year.”
Bird said it will make farmers tighten up their financial situation, reflect on their positions and review next season’s budgets, going down every item and negotiating with suppliers.
“There’s probably things that have crept in over time that can back out. You really have to put a fine-tooth comb over everything going into the autumn when you start doing budgeting.”
One small positive was that large areas of the North Island have plenty of pasture covers, which could allow farmers to reduce their supplementary feed usage and reduce their costs, he said.
