Dairy farm focus on cost-cutting

Dairy farmers will focus on the parts of their business they can easily change as their income drops in the 2014-15 season, according to ASB chief economist Nick Tuffley.

In his quarterly economic forecasts, released this morning, Mr Tuffley said the firstthings farmers would look at were likely to be feed and farm maintenance.

Last season, farmers had incentive to increase production through additional feed and, generally, the feed price was of secondary importance to feed availability. That resulted in palm kernel imports rising by 400 million kg, or 29%, on the previous season, at an additional cost of $120 millon, he said.

''This season, in many cases extra feed doesn't pay. Farmers may reduce the amount of feed they purchase or make what they do have go further.''

Also, farmers were on the lookout for the best deal on feed prices. After being in short supply last year, there would be ample supply of most feeds, Mr Tuffley said.

ASB estimated dairy farm income would drop by $5.7 billion to $9.6 billion this season from last season's record $15.3 billion.

The drop put the sector back to where it had been. Sector income rose by $5.6 billion in 2014 from $9.7 billion in 2013, he said.

Better production and dividends aside, the drop in income was large and the drop would have consequences both on and off the farm.

The short-term economic consequences were predictable. Overdrafts would rise and farmers would seek to rein in costs where they could.

In contrast, the longer-term consequences depended on how farmers' expectations changed.

''At this juncture, we see farmer expectations holding up and for this to underpin activity for now. If farmers begin to factor in permanently lower incomes, investment activity will fall.''

Farmers were likely to defer non-essential maintenance such as fencing. In the same vein, machinery and capital purchases were likely to be put on hold, Mr Tuffley said.

Farm bike repair businesses might have a good season as farmers made the old bike last another season while new farm bike sales might stall.

The other area, although not strictly farm-related, was farmers having a degree of immediate flexibility with their private spending. The lower milk price forecast for the season had already been reflected in lower September quarter consumer confidence in dairying regions.

Most farmers had the flexibility to increase debt if necessary, he said.

Following the record income of last season, sector debt had fallen to $18.90 per kg of milk solids in 2014 from $19.70 kg/ms in 2013. Since 2008, sector debt had been as high as $20.80 kg/ms in 2009 and as low as $18.40 in 2012.

August agricultural bank deposits were up 23% compared with August last year. Similarly, annual agricultural credit growth was low at 4%, reflecting the repayment of farm debt the previous season, Mr Tuffley said.

''Generally, there is credit available. Bank bad debts are at low levels and interest rates remain at historically low levels.''

While the sector was generally well-placed for one rough season, the slowdown of dairy investment or otherwise hinged more critically on farmer expectations for the following season and beyond.

Commentators, including ASB, were pointing to a rebound in dairy prices in 2015 and for the milk price to increase the following season.

From $5.10 kg/ms this season, ASB was forecasting a rise to $6.50 kg/ms for the 2016 season.

''As it stands, farmers can distinguish between the dairy commodity cycle and the emerging economy-driven structural lift in dairy prices. However, back-to-back low milk price seasons would see farmers quickly start to question this premise,'' Mr Tuffley said.

At a glance

• Dairy farmers will:Reduce the amount of feed they purchase.
• Defer non-essential maintenance such as fencing.
• Put machinery and capital purchases on hold;Take on more debt if necessary.


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