A Waikato dairy farmer says “the storm is coming” as forecasts show the cost of producing milk could be above the midpoint that New Zealand’s major dairy companies are currently paying. However, Fonterra chief executive Miles Hurrell says there is still confidence in the medium- to long-term outlook.
DairyNZ DairyBase data is forecasting the total farm work costs for the current season to increase to around $9 per kilogram of milk solids (KgMS) for the current season – an 11% increase on last season’s $8.13/KgMS.
That’s about 50c higher than Fonterra’s current midpoint of $8.50/kgMS. NZ stock exchange-listed Synlait is paying the same price.
DairyNZ said the increase was mainly driven by increases in feed, up 21%, fertiliser, up 28%, and interest costs, which saw the biggest increase, up 39%.
Its forecast figure includes farm working expenses, depreciation, interest and rent, tax and cost of borrowing.
DairyNZ said farmers are used to dealing with volatility and a fluctuating milk price.
“There are seasons where the milk price is high, and other seasons where we see the milk price decrease.
“They do prepare for the fluctuations and regularly set and review budgets to check costs are tracking with revenue and that’s never been more critical.”
It also said that different farmers will have lower or higher costs depending on their situation and location.
As well as that, earlier this week, Beef + Lamb NZ said it expects farmer profitability to fall sharply due to reduced livestock prices and continued high inflation.
Its mid-season update said farm profit before tax was estimated at $146,300, a 31% decrease from 2021-22 and below the average for the past five years.
For the past 12 months, farmers’ margins have been under pressure. However, that has been offset by higher-than-average global milk prices.
Bart van de Ven, a dairy farmer in the Waikato, milks about 200 cows and supplies Fonterra. He described the figures as concerning.
He said there are a lot of “sweaty” people out there, concerned about the declining payout in particular.
For the past few years, while costs increased, the payout was still pretty good.
Van de Ven’s biggest cost increases have been diesel, contractors and fertiliser.
Farmers are now having conversations about how to “make it through”, he said.
“I don’t think it is going to get any easier. The storm is coming … wait until October.”
Forsyth Barr analysts wrote in their recent Dairy Farm Digest that farmers are looking closely at their operations and making tweaks to improve their profitability.
Some, they said, are making changes, including milking only once a day or three times every two days.
“Others are becoming more self-sufficient and therefore not grazing stock out as previously. Part of this change is in response to labour shortages, but it is also in response to reducing nutrient emission levels.”
Industry commentators said uncertainty in the dairy industry is causing farmers to rethink capital expenditure.
Forsyth Barr’s analysts wrote: “While the banks are offering money to invest in the sector, farmers are taking a cautious approach due to several factors, including the shortage of labour, government legislation and the falling milk price.”
Fonterra’s Hurrell hadn’t seen the figures but was visibly surprised when BusinessDesk showed them to him following the release of the co-op’s annual results on Thursday March 16.
The co-op has trimmed its farmgate milk price at least twice this season. The latest was two weeks ago, when Hurrell said the new range reflected softened demand at a time of balanced supply.
Asked whether he is concerned about what further trims may mean for those on farm, Hurrell said the international market will determine where the milk price goes.
However, he said, they have seen China come back in recent times. The country’s demand for dairy products was weaker last year due to its strict covid rules.
“That’s positive. They were quiet in the back end of the ’22 calendar year.”
But at the same time, Hurrell said, they had seen other markets “being a bit quieter” with their buying behaviour.
The industry has also seen the re-emergence of milk out of Europe and North America.
“All of those things coupled suggests we need to watch that very closely, but when you look through that, medium to long term, we still feel we are at a very good place,” he said.