Bleak forecast for dairy farmers

Broker OMF predicts a third season of weak milk prices.

Financial broker OMF is warning the average New Zealand dairy farmer is likely to lose $140,760 this season, with next year looking just as grim.

In its monthly New Zealand dairy report OMF suggests there is a further risk that Fonterra Cooperative Group could lower payouts again, pointing to a potential milk price of $3.89 per kilogram of milk solids.

Fonterra lowered prices on January 28 to $4.15/kgMS. OMF estimates the current cost of production is $5.31/kgMS.

OMF said dairy farmers are likely to face a third season of weak prices, with many becoming increasingly reliant on credit lines and vulnerable to a shift in banks' willingness to "extend and pretend" loans are going to be repaid.

DairyNZ estimates 85 percent of dairy farmers will make a loss this season, compared to 49 percent last season.

The broker argues that at present banks are showing a willingness to extend credit lines to struggling dairy farmers on the assumption that the outlook will improve but that lenders may soon begin to manage exposed debtors out of their holdings, and anecdotally this appears to be happening.

BusinessDesk reported last month that banks say more of the most heavily indebted dairy farmers will be asked to sell up as non-performing loans increase with the lower forecast payout. Bankers spoken to by BusinessDesk and rural advisors said the most marginal farmers were having their debt capped with no further working capital supplied while others are being urged to sell up.

In June, the Reserve Bank put the level of debt in the dairy sector at $37.9 billion.

OMF says that may be an under-estimate because the central bank's figures are largely based on data sourced from owner-operator farms and doesn't include the debt of Fonterra, supply chain businesses and sheep and beef farmers reliant on dairy for marginal income.

Pressure on Fonterra's financials is also likely to be growing, OMF said, citing an increase in its total liabilities and arguing it looks increasingly vulnerable to lenders tightening credit availability. Credit ratings agencies Fitch and Standard & Poor's downgraded Fonterra's credit rating last October.

In a broader look at the dairy industry worldwide, OMF says subdued demand from China and the trade embargo on Russia are likely to remain the key features obstructing the rebalance of supply and demand in global markets.

EU production was 3.1 percent higher on a year ago and OMF cited Dairy Australia as saying "a supply response (from the EU) remains elusive".

- BusinessDesk