Tuesday, February 27, 2024

Wary eye on prices as farmers chase efficiencies

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‘Quite a bit of concern’ about input prices, say industry leaders.
With feed and fertiliser costs going up, farmers will be reconsidering all aspects of the operation, including harvesting or buying-in supplements.
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Dairy farmers are keeping a nervous eye on product prices after the recent fall in the milk price eroded the margin between profit and loss.

The most recent 4.9% lift is encouraging but more will be needed to hold or increase the milk price, Federated Farmers dairy chair Richard McIntyre said.

“There’s quite a bit of concern around input prices and where they are going, because I don’t think they are stable either,” he said.

Fertiliser, fuel and feed prices, as well as labour and its availability, will be looked at by farmers as spring approaches.

These will all drive their ability to purchase and harvest supplements and the price they will be paying for them. Once that figure is known, they will then make a call about how much they are prepared to either purchase or create, he said.

“That will help drive their decisions around if the milk price drops further and there’s little to no margin in the milk.”

Fonterra reduced its forecast by 25 cents in August following a string of negative GDT auction results. This saw its midpoint range fall from $9.50/kg MS to $9.25/kg MS.

If the price drops further and input prices remain the same and there is hardly any margin in the milk, farmers will likely make decisions around reducing costs by culling early rather than increasing or maintaining feed supply, McIntyre said.

Farmers are in a far better position to take a financial loss than they were the last time the payout fell.

At that time, the industry was still expanding and farmers had accumulated a lot of debt as a result.

“I think we’re more resilient as an industry now and we’ve certainly got some headwinds coming our way.”

According to the New Zealand Herald, on average, dairy farmers have repaid about $3 of bank debt per kg of milksolids in recent years.

“Total dairy sector debt has declined by around 12% ($5 billion) since its peak level in 2018, reducing debt-servicing costs, and meaning farmers will be better positioned to deal with any potential future downturn in dairy prices,” it quoted the Reserve Bank as saying.

DairyNZ solutions and development lead advisor Paul Bird said there is a lot of nervousness among farmers, though most have more cash on hand thanks to debt servicing.

“It’s not dire, but nervousness describes it. People aren’t in a bad way financially because they have been betting a lot of money but it’s not that much more because of costs.”

While it is too early to say whether the rise in costs has caused farmers to switch to lower-input farm systems, he said he suspects there was a lift in supplement use last season due to the high milk price.

But those decisions will face much greater scrutiny this season.

Those farmers who modify their systems according to the milk price tend to be worse off financially compared to those who stay with one system and try to farm it as best they can, he said.

“There’s evidence around that. We know that the farmers who focus on their top-level grazing management are the ones that can cope with things because they have the biggest profit margin and the most robust farm systems.”

Those systems centre on good grazing management, keeping costs down and trying to achieve as good a profit margin as possible.

They are not distracted by things outside their control, Bird said.

Pasture remains the cheapest feed for dairy farmers and if the milk price falls further, it will become even more valuable.

“Wherever we go, we see a one to two tonne difference of pasture per hectare between the top grazing managers and those that aren’t. It’s not easy and you have to have a lot of skill to get that.”

He also urged farmers to monitor their budgets. He is convinced that those farmers who do this make 10% more profit than those who do not.

In July, the AgFirst annual Financial Survey calculated that farm working expenses of $5.95/kg MS in 2022-2023 mean they would have increased 36% in two years. The biggest two items of expenditure are feed costs, projected to increase by 19%; and fertiliser expenditure, which is up 30%.

McIntyre said farmers have set up their farm systems based on using inputs in the most efficient manner possible relative to their costs.

The massive jump in those costs in the past few years means farmers are re-examining their systems to see how they can get those efficiencies back.

“Do I trade out some nitrogen for some palm kernel or for some maize, for example.

“Think of it like America’s Cup racing. You’re not changing the direction you’re going in; it’s trimming the sales a little bit.”