Flow-on effect from lower milk payout

Dairy farmers face a substantial drop in income this year. Photo supplied
Dairy farmers face a substantial drop in income this year. Photo supplied
Belt-tightening is expected across the dairy industry, with flow-on effects for rural communities, as farmers face a substantial drop in income this season.

Fonterra has dropped its forecast milk price for the 2014-15 season from $7 to $6, as international dairy prices remain under pressure.

The financial impact to farmers' bottom lines would depend on the extent of that belt-tightening, ANZ rural economist Con Williams said.

As the drop had been signalled early enough in the season, there should be some flexibility to adjust expenditures.

There were also deferred payments from 2013-14 still to be deposited in bank balances over coming months, which should provide a cash buffer heading into a leaner year.

''Mechanically, putting this revised milk payout into our average farm model produces farm profit of $920 per hectare.

''This is well below the seven-year average of $1485 per hectare and well down on the record $3500 per hectare in 2013-14,'' Mr Williams said.

There would be a flow-on effect on spending and investment in the broader economy, especially in many of the regional centres, he said.

Last season, dairying pumped an estimated $727 million into the Otago regional economy.

Figures from DairyNZ showed the estimated drop in farmer income for Otago would be $92 million and $218 million for Southland.

Dairy farm consultant Kevin Wilson, from Dunedin-based AbacusBio, said it was a good time for dairy farmers to review their budgets.

At a $7 payout, many might have had capital expenditure in there, repairs and maintenance should be looked at and the likes of capital fertiliser might ''go on the back burner''.

A $6 payout was still ''pretty good'' and most farmers would still make a profit, the ''odd exception'' being those who were highly geared, who would break even.

Circumstances could change between now and the end of the season and a further 50c drop would see a lot of farmers in a break-even position, he said.

Most farmers would have budgeted on $6-$6.50 and most would ''go back to the drawing board'' and redo budgets.

''It's not pleasant but they'll bite the bullet and make hard decisions,'' he said.

It was also a good time to look at on-farm systems and ''dot the i's and cross the t's'' in terms of pasture management, and using supplements strategically.

Farmers now had very good support networks around them and Mr Wilson encouraged them to make use of those networks.

They ran multimillion-dollar businesses and most had regular contact with their accountants, lawyers and farming professionals.

''Everyone will have a few ideas which, put together, can make a big difference to farm profit,'' he said.

Federated Farmers dairy chairman Andrew Hoggard also urged farmers to watch costs closely, re-forecast budgets and

talk to their bank manager, farm consultant and accountant.

While a revision was expected, given the slide in GlobalDairyTrade prices over much of the current season, the size of the drop was.

''Several weeks ago, we agreed with the banks it could be in the $6 to $6.25 kg ms range, but we thought it would have been a less severe haircut,'' he said.

Given half of what farmers got paid was spent locally, it would impact on towns, but cities would not be immune either.

But it was ''not all doom and gloom'' and Mr Hoggard was confident the payout would progressively lift as the season unfolded.

''I think you will find we are in a season of two halves. The first half isn't flash, but after halftime ... we'll be back on form,'' he said.

Westland Milk Products has announced a payout prediction of $6-$6.40 kg ms before retentions for the 2014-15 season.

It has also kept its payout prediction for the 2013-14 season at $7.50-$7.70 before retentions.

While some industry commentators had speculated the weakening New Zealand dollar might offset the impact of lowered dairy prices and therefore benefit payouts, Westland's chief executive Rod Quin cautioned that, to date, the decline in the dollar had been very small and the currency remained overvalued.

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