A falling global milk price and a dry, windy El Niño summer mean a challenging season ahead for the dairy sector, a new report from BakerAg warns.
The farm consultancy firm’s annual Dairy Systems Monitoring Report says it expects the coming season to be lean.
It calculates that the average farm in the group it monitors is likely to have only 50 cents per kilogram of milk solids for tax, principal repayment and capital expenditure.
“Not easy when the last three seasons have delivered up to $2.50/kg MS of discretionary cash,” it says.
That figure is based on an $8/kg milk solid milk price, along with 70 cents of other revenue using $6.53/kg MS of cash working expenditure, resulting in a cash operating result of $2.20/kg MS.
Factored into this is $20/kg MS debt at 8.5% interest, which equals $1.70/kg MS of debt servicing.
The analysis across its monitored farms for the previous season showed that a 13% drop in milk price coupled with an 8% increase in operating expenditure delivered a 46% drop in EBIT ($/ha).
The report is based on the financial results of 50 farms across New Zealand that work in a range of systems.
BakerAg urged farmers to plan now for what may follow this season.
“We are about to navigate a period of low commodity prices, which can be extremely stressful for some. Part of that stress is driven by a lack of planning. Typically, these farmers are making decisions on the move. Reactionary responses based on emotion.”
On top of the financial squeeze is the expected El Niño weather pattern this summer.
“We will need to be prepared for drier, windy conditions this summer.
“While we might briefly appreciate drier soils it could be that an early summer drought could eventuate.”
The report suggested those with good records look back at the springs of 1987, 1991, 1993, 1994, 1997, 2002, 2006, 2014 and 2015 for guidance around rainfall and pasture production.
BakerAg consultant and report author Chris Lewis said a year ago, there was a mindset that farmers would be looking at a $10/kg MS milk price and a $6/kg MS operating structure based on the then future market.
“They started the season like that, and they got squeezed.”
The subsequent reduction in milk price combined with the cost increase shifted the goalposts, he said.
“It didn’t just shift those goalposts a metre back or sideways, it shifted them right around the other side of the paddock.
“The consequences of that, is that what had worked for people the previous year didn’t work in the season just finished.”
Within the monitored farm group, the ones that emerged in the top five were those that used supplementary feed sparingly and showed a lot of discipline in their cost structure.
“They had a tighter, leaner farm feeding system. While there were some other defining points, those were the ones that really stuck out.”
The new season has a tighter milk price along with inflationary pressures affecting costs and as a result, that lean approach will have to continue, particularly around supplementary feed, he said.
“They must scrutinise.
“The more intensive your farm system is, the more you are relying on other feeds, the harder you are going to have to scrutinise your farm system.”
They will have to be extremely diligent if they are going to break even this season.
Lewis also acknowledges that is challenging, given the current conditions on many North Island farms that are contending with waterlogged pastures with low cover.
For them, looking after their core asset – their cows and their staff – is key and should not be compromised.
But for other spending decisions within the farm business, they must ask not only what it costs, but also what are its benefits.
“Don’t cut costs for the sake of cutting costs.”
If farmers look after their herd for the next 60-90 days, it will look after farmers during peak milking.
As well as scrutinising spending, farmers should also prepare now for a possible dry summer by watching their stocking rate in late spring and locking in cheap sources of supplementary feed that can get them through, rather than relying on the spot market, he said.
“Know where the sweet spot is in your business and get there early this year. Get there before the El Niño bites.”
Lewis said he was confident farmers can do it.
“We have been through these cycles before.”