Dairy NZ's latest estimate of breakeven is $5.95 per kg of milk solids. Photo / Supplied
Dairy NZ's latest estimate of breakeven is $5.95 per kg of milk solids. Photo / Supplied
Tight credit conditions and concerns about environmental compliance are taking the shine off what is looking like another season of firm milk prices for dairy farmers.
Fonterra has forecast a wide range - its widest ever - of $6.25 to $7.25 per kg - for 2019/20, against $6.40/kg last season,but bank economists expect the price to gravitate towards the top and of that band and perhaps beyond.
Dairy NZ's latest estimate of breakeven is $5.95 per kg of milk solids.
The Reserve Bank, in its latest financial stability report, said breakeven for those farmers at the high end of the debt scale was $6.20/kg.
Chris Lewis, Federated Farmers dairy chairman, said dairy company directors "seemed confident" of a milk price in the high $6s or early $7s, but that they were wary of over-promising and under-delivering.
He said farmer optimism about milk prices was being tempered by tight credit and uncertainty over future environmental regulation.
Dairy company directors are wary of over-promising and under-delivering, says Chris Lewis, Federated Farmers dairy chairman.
"Credit in the farming community is not as generous as it was three or four years ago," he said. "So that's put the brakes on farmer spending."
In the meantime, uncertainty was stifling new investment as farmers awaited more clarity.
Lewis said a firm milk price was welcome, "But life on the farm is not as comfortable as it was 10-15 years ago, when you could have clear margin and when it was very profitable.
"Money is getting tighter and tighter," he said.
The Reserve Bank, in May's financial stability report, said most dairy farms are profitable at current prices.
However, around a third of dairy debt is held in farms with high debt to income ratios, it said.
"Many of these farms struggle to make profits and repay debt, despite good milk prices.
"This is particularly concerning as the costs of the dairy sector may rise in response to longer-term challenges, such as environmental and climate change policies," the bank said then.
"Restoring resilience in the sector will be a challenge for farms and their lenders," it said.
Around 35 percent of dairy farm debt is to farms that have more than $35 of debt per kilogram of milk solids produced annually.
On average, these highly indebted farms require a price of $6.20 per just to break even, the bank said.
Many of these farms struggle to make profits and repay debt, despite good milk prices.
Rural economists are upbeat about the prospects of firm milk prices.
Among the main banks, ANZ is at the top of the range with a $7.30 per kg forecast while BNZ is at the bottom with $6.70/kg.
BNZ economist Doug Steel said global milk supply is constrained at the moment. Europe and the US slowing growth and Australia has been "clobbered" by drought.
New Zealand had a good start to last season but the final part of the season was affected by a dry patch.
"Ordinarily we would be facing a higher milk price forecast but the reason we are not at a higher level is uncertainty, particularly around the trade tensions between the US and others," Steel said.
"Sentiment among farmers is not positive as farmers deal with high debt, rules around nutrient management," Steel said.
ASB senior rural economist Nathan Penny's said Fonterra have been conservative it is forecasts although he highlighted the wriggle room inherent in the $1.00/kg range.
With the new season having started on June, pricing was already pointing to $7.00 thanks mostly to firm world auction prices and a lower New Zealand dollar.
"We are at the $7.00 and if anything we thin the risk see the risk of the milk price being higher than that rather than lower," Penny said.
"The season is starting on the front foot - going on the last auction price and a favourable exchange rate," he said.
"In this environment, it's hard to see the milk price not being healthy," Penny said.
The season is starting on the front foot - going on the last auction price and a favourable exchange rate.
ANZ rural economist Susan Kilsby said the mood in the sector was "not positive".
Weighing on sentiment was high debt and banks encouraging more principal repayments than previously and the availability of capital, which was putting pressure on interest rates, she said.
More stringent requirements governing the nutrient runoff were starting to bite.
"Uncertainty is leading to a lack of investment," she said, adding Fonterra's ongoing underperformance was also tempering industry confidence.
Westpac senior economist Anne Boniface said farmer sentiment had diverged from commodity prices over the last few season.
"I think farmers are worried about things other than commodity prices for a change," she said.
Westpac senior economist Anne Boniface says farmer sentiment has diverged from commodity prices over the past few seasons. Photo / File
"In particular, they are worried about regulation, increased costs, carbon prices, access to water and local council regulations."
Debt levels were high, she said, but were not growing significantly.
"The thing for dairy farmers is that interest rates are falling debt is not increasing.
"On the debt front I don't think there is any pressure, so long as prices remain high," she said.
Looking ahead, Boniface sad the big question was how Chinese dairy demand would hold up in the face of slower growth there.
