2023/24 milk price of $8/kg will be a pinch for farmers

Not so long ago, a milk price of around $8 a kg would have been good news for farmers.

The same cannot be said for now - inflation has seen to that.

Dairy co-op Fonterra last week pitched its forecast for the 2023/24 season, which starts today in a $7.25 to $8.75/kg of milksolids range, with an $8/kg mid-point.

Fonterra, in recognising the pressure that farmers are under, said it had designed a new advance rate guideline to get cash to them earlier in the season.

John Stevenson, who chairs the Fonterra Shareholders Council, said the financial situation on farms was tight, but the co-op’s new advance rate schedule would be appreciated.

Stevenson said the break-even point for farmers would depend on their costs, and how much debt they have.

“But anything around $8/kg is pretty close to breakeven,” Stevenson said.

“I’m assuming that with this opening milk price, farmers will look really hard at their budgets and tighten their belts going into the new season,” he said.

“Twenty-four months ago, it would have been a really good milk price.

“It’s just that we have seen those input costs rise over the last 12 months – 15 per cent plus – which is pretty material for farmers’ budgets, that’s for sure.”

The co-op paid its highest-ever price of $9.30/kg in 2021/22 and $8.20/kg is pencilled in for 2022/23.

The farmer-funded Dairy NZ said inflation had eaten into farm returns.

Dairy NZ chief executive Tim Mackle said farmers, like everyone in New Zealand, were feeling the pressures of inflation and increasing costs.

“Farmers have seen an increase in their costs in recent years, with total expenses in 2021/22 at $8.13/kg, and this is forecast to be around $9/kg for the 2022/23 season, which is an increase of around 11 per cent on last season,” he said.

“This is largely being driven by increases in feed (up 21 per cent), fertiliser (28 per cent) and interest costs (39 per cent), compared to the 2021/22 season.

“Our farmers are adaptable and used to milk fluctuation prices, and the current mid-point for the 2022/23 season of $8.20 remains high compared to the average 20-year milk price of $7.51 per kg/MS when allowing for inflation,” he said.

Mackle said the issue wasn’t the current milk price, it was the increasing costs.

“Every farm is different, but given the scale of cost increases, most farms will be feeling the profit squeeze.”

“We are also seeing some key costs including urea and supplementary feed expenses are easing now, which will be providing some relief for farmers, especially looking ahead to the new season.”

Economists' forecasts for the 2023/24 season are a mixed bag. Photo / Duncan Brown

Economists’ forecasts for the 2023/24 season are a mixed bag.

ASB expects to see a milk price either at or below the bottom end of Fonterra’s $7.25 to $8.75/kg range and the bank gives ongoing concerns about China as the main reason for its caution. ANZ sees $8.50/kg and Rabobank has a forecast of $8.20/kg.

The outlier is Westpac, which is sticking with $10/kg.

Westpac senior agri economist Nathan Penny said there were “clear risks” to the bank’s forecast.

“The first one, which has snuck up really quickly, is that end-of-season New Zealand production has been through the roof.

“April was a record high for an April month – up 7 per cent on a year ago.

“It seems like that continued into May, so we are probably looking at two record months to end the season,” Penny said, adding the season’s production could end up being significantly higher than last season’s.

“That’s a significant change in the production outlook, although it may be temporary.”

Then there were the Global Dairy Trade auctions, which had been “muddling along” rather than being positive.

“So that’s another risk to my forecast.”

The flipside was that the lower New Zealand dollar, which trades at just over US60c, would be beneficial.

The Reserve Bank, in its May Financial Stability Report, said falling dairy prices over the past six months alongside increasing farm input costs, such as those of fuel, fertilisers, and labour, were putting pressure on profit margins.

Another significant concern for the dairy sector is increasing debt servicing costs. At an aggregate level, average interest costs per unit of production increased to $1.20 per kgMS from $0.50 per kgMS in mid-2021, the central bank said.

“Narrowing margins from rising costs and falling international dairy prices have led to more requests from farmers for working capital and overdrafts to meet short-term cashflow needs,” it said.

Westpac’s Penny said it looked like farm inflation was now starting to come off the boil.

“From a banking point of view, we are looking through this tighter period - essentially looking through the cycle,” he said.

“That’s our approach.”