Tight margins are set to continue for many New Zealand dairy farmers due to inflationary pressures, DairyNZ says.
DairyNZ’s head of economics, Mark Storey, said that despite a reasonable farmgate milk price payout predicted for the current 2024/25 season, high costs and inflation are continuing to affect farmers’ bottom line,the price per kilo of milk solids (kg/MS).
“The recent opening Fonterra farmgate milk price forecast for this season of $7.25 – $8.75 per kg/MS, with a midpoint of $8 per kg/MS – was in line with expectations, and many farmers would have been planning for this, while optimistically hoping for more,” Storey said.
“Despite these strong prices, high expenses continue to erode farmers’ financial positions.”
DairyNZ’s latest forecast data on its Econ Tracker shows the national break-even forecast sits at $8.07 per kg/MS – below DairyNZ’s forecast average payout received of $8.34 per kg/MS.
“We have now seen several seasons with tight profit margins for dairy farmers,” Storey said.
“While farmers have shown their ability to adapt, continued low margins will inevitably affect their ability to respond to shocks and adverse events,” he said.
The tracker aims to help farmers budget through tight conditions and improve resilience in the long term.
Storey said DairyNZ’s June quarterly update includes an analysis of non-operational expenses, including interest and rent, tax, and net drawings, and what findings from the 2022/23 season can mean for this season.
“In the 2022/23 season we saw non-operational expenses account for 42 per cent of farms’ total expenditure, with interest rates being the highest of these expenses,” he said.
The analysis showed that at an interest rate of 8.25 per cent, about 40 per cent of farms would pay more than $2 per kg.
“Our analysis illustrates the significant impact of non-operational expenses, in particular interest costs, on farmers’ cash positions – a critical factor influencing the resilience of farms over time.”
Storey said farmers will be working closely with their advisers this season, to manage the expected limited operating profits.
Inflation has eaten into dairy farm returns.
The break-even milk price is the milk sale price per kilogram of milk solids to cover a farm’s costs in a season, excluding capital expenditure and principal repaid on loans.
The forecast average payout is based on the estimated milk receipts for the specified season, with dairy company dividends.
Fonterra’s $8/kg midpoint forecast for the current season is low compared to economists’ forecasts, which were around $8.40 and $8.50.
At last week’s Global Dairy Trade auction – the first for the current season – whole milk powder prices increased 1.7 per cent to an average price of US$3478/tonne ($5680/tonne).
ANZ, in releasing its latest commodities price index, said dairy prices gained 2.9 per cent, month-on-month, in May.
Dairy commodity prices are 5.7 per cent stronger than they were at the beginning of the previous milk production season, the bank said.
Anhydrous milkfat pricing is now at record levels and butter prices are only marginally below the level achieved in early 2022.
Fonterra’s current $8/kg forecast compares with the $7.80/kg forecast for the past 2023/24 season, $8.22/kg in 2022/23 and the record $9.30/kg paid in 2021/22.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
