Dairy production is hitting its season peak. Photo / NZME
Dairy production is hitting its season peak. Photo / NZME
As the dairy sector hits its seasonal peak, farmers find themselves in a better place financially.
Production has been strong, prices have been steady to firmer, interest rates are heading down, and Fonterra’s milk price and dividends are looking better than they were a few months back.
Last month, Fonterraannounced a 50c lift in its 2024/25 forecast farmgate milk price midpoint to $9.00 per kg of milksolids, increased its 2025 earnings guidance of 40-60c a share, and paid a total dividend for 2024 of 55c – the second biggest since the co-op was formed.
The dairy exporting giant said at the time the lift in the milk price was because of strengthening in Global Dairy Trade (GDT) auction prices and constrained milk supply in key producing regions.
At $9.00, that would make it the second highest on record ($9.30/kg was paid in 2021/22), but on-farm costs have also risen sharply.
DairyNZ’s estimate of breakeven is $8.15 a kg, which puts some perspective on the latest forecast.
A $9.00/kg milk price hardly has dairy farmers celebrating, but it is a big improvement on Fonterra’s opening forecast for 2024/25, which had an $8.00/kg mid-point.
Fonterra’s upgrades have a flow-on effect for other players, and for the broader economy, DairyNZ’s head of economics, Mark Storey, told the Herald.
“It’s a bright light for the economy, which is doing it pretty tough at the moment,” Storey said.
Storey estimates that Fonterra’s milk price and dividend increases represent a revenue boost of $640m across the dairy farming sector.
For the wider economy, that means an extra $1.4 billion to $1.7b, he says.
“It means that the farming sector, despite quite tough economic times, is doing its bit to keep the economy humming.”
Storey said last week’s 50 basis point rate cut from the Reserve Bank was welcome news, but that it would be next season before farmers felt the full benefit.
He noted farm expenses have risen sharply and have stayed high.
“For getting by on a year-by-year basis, farmers need to be getting well over $8.00/kg to be in the black.
“Anything with a $9 in front of it is probably what we need as a sector to see some confidence.
“High costs are baked in, but interest costs will start to come down and that will help,” he said.
Fonterra's milk price is the second highest on record.
DairyNZ forecasts average farm operating profits for the current season to be $572,729, based on a national average of 451 cows milked, up from an estimated $403,640 for 2023/24.
“Even at $9.00, a lot of farmers will be making an operating surplus, their actual cash position will depend on the amount of debt they are carrying, and that varies a lot from farm to farm.
“Some will be doing quite well but others will be doing it tough at that price,” he said.
While it had been a good spring, production-wise, the season still had a way to go.
“But for this time of year, I think the sector is sitting quite well,” he said.
ANZ agriculture economist Susan Kilsby says a $9 milk price will allow many farmers to spend on the repairs and maintenance and fertiliser that many cut back on last season.
“We also expect the higher returns to result in an increase in principal debt repayments,” she said in a report.
This morning’s Global Dairy Trade auction was flat, but whole milk powder – the main driver of Fonterra’s milk price – traded at an average US$3553/tonne, having come a long way since July when it was at US$3142/tonne.
NZX dairy analyst Rosalind Crickett said New Zealand is enjoying buoyant milk production, while other major producing regions such as North and South America and Europe were seeing flat to year-on-year declines.
“We are also yet to see any real implications of the Chinese Government stimulus measures on dairy imports,” she said.
New Zealand milk production over August was up 10%, year-on-year, and the highest August recording since 2020.
It brings the season-to-date figure to an 8.3% improvement on last year.
The season typically peaks in October, but November, December and January are also high-producing months.
The buoyant start to the production season had been facilitated by early calving and good cover built during the earlier winter months, she said.
Farmers also noted the positive implications of less rainfall, with pasture showing lower damage because of less surface water.
Lower rainfall has also meant the application of fertilisers, to set farmers up well for the spring.
Among Fonterra’s competitors, Synlait Milk last week increased its milk price to $9.00 per kgMS from $8.60/kg.
The newly recapitalised Synlait is also paying a one-off 20c/kg to all South Island farms that do not have a cessation notice in place on May 31, 2025.
Synlait’s North Island farmer-suppliers will receive a one-off 5c/kg.
Westland Milk, owned by China’s Yili - is paying $9.10c a kg, in keeping with its commitment to pay 10c over and above Fonterra’s milk price.
Open Country Dairy, which makes four in-season payments, has an $8.70/kg to $9.10/kg milk price range for the current October-November period.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
