Sector's trials to linger

Dairy farmers face testing economic times. Photo by Stephen Jaquiery.
Dairy farmers face testing economic times. Photo by Stephen Jaquiery.
The 2015-16 season is shaping to be a distinctly below-average one for dairy farmers.

Although they might be seeking to put the present difficult season behind them, the challenges seem set to continue for New Zealand's biggest export earner.

The rhetoric around the need for cautious budgeting continues, as farmers face tight cashflows with implications not only for on-farm spending and investment, but also general regional spending.

While Fonterra's opening milk price forecast for next season of $5.25, announced yesterday, was at the high end of expectations, it was still a far cry from this season's opening forecast of $7 which has steadily dropped.

The more immediate effect would be felt from a further 10c cut in the current season's forecast milk price to $4.40.

It would make it ''really tough'' for farmers managing their cashflows through the low winter months with the likelihood of little or no retro payments helping to smooth out that cashflow, Federated Farmers dairy chairman Andrew Hoggard said.

Combined with the dividend, it meant a forecast cash payout of $4.60-$4.70 for a fully shared-up farmer, a stark contrast from the record final cash payout of $8.50 for the 2013-14 season.

Fonterra's advance rate of $3.66 was not scheduled to pick up to $4.17 until February next year, for the milk produced in January, which was going to make the period through to next autumn very difficult, he said.

DairyNZ chief executive Tim Mackle said the opening forecast translated into an average farmer's milk income dropping by $150,000 for this next season.

''We've worked out that the break-even milk price for the average farmer now going forward is $5.70kg/ms, yet under this forecast scenario, they'll only be receiving $4.75 all up in terms of farm income including retro payments from last season and dividends,'' Dr Mackle said.

Farm working expenses would need to be reduced to minimise increasing debt levels further. The flow-on impacts to the local economy would be ''significant''.

DairyNZ would be shifting its Tactics for Tight Times campaign to a seasonal calendar of advice on ''farming fundamentals'' that would

give farmers targeted guidance on key decisions.

ASB rural economist Nathan Penny said the bank stuck with its ''slightly more optimistic'' forecast that the milk price would lift to $5.70 by the end of the 2015-16 season.

While that was contingent on global dairy prices recovering over the season, the timing of any price rebound remained difficult to predict.

If milk supply remained high and Chinese demand weak, prices might take longer to recover than ASB at present anticipated, he said.

Tight cashflow would affect on-farm spending and investment, as well as general regional spending.

It was likely a further split in spending growth and confidence would emerge over the rest of the year between Auckland, Christchurch and the provinces.

Labour has reiterated how the forecast payout showed the need for a plan to diversify the economy, with finance spokesman Grant Robertson describing it as a $13 billion ''economic black hole'' over the next two years.

''Not only will the economic black hole be a significant blow to the overall economy, it will really hurt regions and communities dependent on dairy and that have been neglected by National,'' he said.

While Labour wanted the dairy industry to thrive, it was not good for farmers to have to carry much of the burden of economic growth on their own, he said.

Fonterra chairman John Wilson said the revised 2014-15 forecast reflected the reality that global commodity prices had not increased as expected, while the forecast milk price for 2015-16 was based on Fonterra's best view of long-term global dairy supply and demand.

''We can expect prices to recover going forward, and to see a rebalancing of supply and demand over the season.

''However, it is more difficult this early in the season to determine exactly when this recovery will lead to a sustained price improvement.''

Fonterra chief executive Theo Spierings said the long-term fundamentals of global dairy demand were strong.

''Our forecast for the new season takes into account a range of factors including global milk production forecasts, the economic outlook of major dairy importers, current inventory levels and geopolitical events,'' he said.

The co-operative was ''absolutely focused'' on improving farmer returns and driving its performance.

 


At a glance

• Opening milk price forecast of $5.25

• Average farmer's income expected to drop by $150,000

• Further cut in this season's price to $4.40

• Economic black hole of $13 billion forecast 


 

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