An average-sized dairy farm in Waikato and Bay of Plenty operated at an $86,000 loss in the 2023-2024 season, with expected milk payouts below break-even point, a new financial survey report says.
The annual report by agricultural, horticultural
Dairy farming: Fonterra share payments help save bacon but farmers struggling to break even with high interest rates
Waikato and Bay of Plenty dairy farms are in good heart physically but the books tell a different story, says AgFirst. Photo / Shawn McAvinue
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“Currently the expectation is for a similar result in 2024-2025. While the forecasted [sic] payout has increased slightly, costs and interest rates are still high and the model is budgeting for another loss to the farm business, again largely offset by the expected dividend payment [from Fonterra].”
The yet-to-be-announced final milk payout for the 2023-2024 season was expected to be $7.75/kg, an improvement on expectations at the start of the season, but below the AgFirst model’s break-even point of $9/kg.
The expected milk payout for the new season at $8/kg was also below break-even level.
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A reduction in interest rates would have a major impact on making a farm profitable, AgFirst said.
A 1% reduction in interest rates equated to around a 20c/kg reduction in debt servicing costs. If interest rates dropped by 2-3% over the next two seasons, there would be a marked impact on the break-even payout.
In the 2023-2024 season, net cash income for the model was down by 6% compared with the previous season.
While some farm costs, including fertiliser expenditure and regrassing, reduced significantly, permanent labour costs and debt servicing costs increased.
Due to rising interest rates, a farm in the model paid 15% more in debt-servicing costs.
This meant total debt-servicing cost for the model increased by 78% compared with two years ago, AgFirst said.
Tax liability fell 75% in line with the profitability decrease. The model showed farms made full principal repayment, with most monitored farms also doing so, flowing on from the Fonterra capital repayment and dividend.
Capital expenditure on plant and machinery replacement costs rose 21%, equating to 61% of depreciation, which meant that plant and machinery continued to be run-down, AgFirst said.
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“The net result is that the farming business operates at a loss of $86,000 for the season... [but is] then offset by the capital repayment and dividend received during the year. As a result of these payments, the farm finishes the year with a positive net cash position... likely to be used in a variety of ways; increased farm working expenditure, higher capital purchases or repayment of debt.”
In the new season, surveyed farmers were budgeting for an average 2% increase in milksolids production, with a slight reduction in cow numbers in keeping with the annual trend.
Overall, net cash income for the current season was budgeted to increase by 1% on last season.
While farms were budgeting for an expected $8/kg milk payment, the actual cash return was expected to be $7.92, down 1%. This was offset by an expectation of higher prices for cull cows.
Overall farm working expenses were budgeted to be up by 1%.
Nominally, the model was budgeting for a farm cash deficit of $85,1000, on a par with last season. It was budgeting for another full principal debt repayment, as were most monitored farms.
Capital purchases had also been budgeted for, but 69% down on the level of depreciation.
“The deficit is then again largely offset by the budgeted dividend payment from Fonterra, such that the overall net cash position for the business is -$14,500,” AgFirst said.
Non-Fonterra suppliers and sharemilkers who did not receive these payments were very likely to cut farm operating costs and defer principal payments to reduce their loss levels.
“But similar to the 2023-2024 season, the farm business is again operating at a loss, to be then cross-subsidised from the investment business.”
Farmer morale was “okay”, AgFirst said.
“Physically, farms are going into the new season in good shape, and while finances are still very tight, there is some expectation that the worst is behind us.”
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the $26 billion dairy industry, agribusiness, exporting and the logistics sector and supply chains.
