An estimated $5 billion has been wiped off of the economy with news today that Fonterra has reduced its forecast farmgate milk price midpoint from $8 to $7kg/MS.
AgFirst economist Phil Journeaux said the $1/kgMS cut will reduce farm incomes by about $1bn, and the economic impact to the country will be about $5bn.
Farmers said they had been expecting a drop in the farmgate price for the coming season, but the magnitude has surprised them.
Fonterra said its forecast farmgate price range for the coming season is now $6.25-$7.75/kgMS, with a midpoint of $7/kgMS, down from $7.25-$8.75/kgMS, with a midpoint of $8/kgMS.
Journeaux said he was surprised by the size of the reduction, which will have a significant impact on farmers.
“Things are going to get bloody serious very quickly.”
An AgFirst financial survey of dairy farms in the Waikato and Bay of Plenty released on Thursday calculated a break-even point of $8.29/kgMS.
At a payout of $8.10kg/MS, AgFirst calculated those farms would record a loss of $54,600.
Journeaux said at $7/kgMS, that deficit worsens to $138,000.
Fonterra shareholders will be able to offset that loss with dividend payment and capital distribution, but that is not available to sharemilkers and non-Fonterra shareholders.
“Basically it will mean slashing any farm working expenses, debt repayment, capital expenditure, cutting repairs and maintenance and fertiliser.”
Southland dairy farmer Robert Kempthorne said his goal is to prevent the fiscal impact compounding by containing it in one season.
He is resigned to not making any capital investments, making only essential repairs and maintenance and being strategic with fertiliser use.
“We knew it was possible but it will definitely send a shock wave, [not only] through rural communities but NZ as a whole in terms of how fragile things are.”
Bay of Plenty farmer Darryl Jensen said while he is confident he can weather the storm, he feels for new farm owners who have high debt levels.
The price forecast follows a wet year for many farmers in the north of the country, in which they incurred extra costs in addition to sharply rising costs and interest rates.
“There is real pressure on our businesses.”
He predicts plenty of conversations between farmers and their banks.
Fonterra chief executive Miles Hurrell said confidence in May that Chinese demand would lift had not been realised.
Since then, Global Dairy Trade (GDT) whole milk powder prices have fallen 12% and China’s share of GDT events has been below average.
“This reflects a current surplus of fresh milk in China, resulting in elevated levels of local production of whole milk powder, and reducing near-term whole milk powder import requirements.”
Information provided by Fonterra shows the forecast advance payment for the coming season will be between $5.25/kgMS and $5.80/kgMS, down from $5.70/kgMS to $6.75/kgMS for the same period last season.
Rabobank Agribusiness Monthly report notes that most dairy prices are below five-year averages as producers wait for China to re-enter the market.
Northern hemisphere milk production is flat due to hot weather, and cow numbers are falling as farmers reduce costs.