Fonterra's lower-than- expected milk solids forecast payout for next season was still well above the long-term average, a banking leader said yesterday.
The estimate was $6.60 a kg milk solids (kg m/s).
With average farm input costs rising in the last year by $1 a kg m/s to around $4 kg m/s, farmers are being advised to look carefully at their spending.
Last season's record $7.90 kg milk solids (kg m/s) payout aside, Westpac senior economist Doug Steel said the five year average payout was $4.20 kg m/s, so $6.60 kg m/s was still acceptable.
"If you were expecting $8 kg m/s it is bad news, but in the historical context $4.20 is good, but perhaps not as good as it could have been."
International dairy prices have fallen by up to 38% in the last 14 months as consumers resist record prices. As economic growth starts to slow this puts pressure on commodity prices.
Rabobank reports milk production in the last three months grew 8.4% in Argentina, 3.6% in Australia and 2.4% in the United States.
Soaring costs would absorb much of the payout.
Rabobank Dunedin regional manager, Jeffrey Morrison, said average farm working costs, excluding debt servicing, tax, drawings and capital expenditure, were about $4, increasing from about $3 a kg m/s last year and between $2 and $2.80 the year before.
Mr Morrison said the lower payout would impact on the viability for some converting sheep and beef farms to dairying.
"It could still be a reasonable option for an existing land owner with very little debt."
Mr Morrison saw the lower forecast price as a levelling off, and said Fonterra had signalled it was coming.
"We still have confidence in the dairy industry and view this as a levelling off."
Dairy New Zealand field extension manager, Dave Miller, said drought, on-farm inflation and increased discretionary spending had in the last year increased farm working expenses from $3 kg m/s to $4 kg m/s.
In addition to that, interest and rent added another 80c to $1 kg m/s, taking the total to about $5 kg m/s, while over and above that came personal drawings, debt repayment and capital expenditure.
Mr Miller said the revised payout would focus farmers on running "good, strong cash- positive businesses".
Farm input costs increased 10% in the last year, led by fuel (40%), feed and grazing (17%), fertiliser and seed (16%), and electricity (11%).
Mr Miller expected farmers to be more disciplined with the volumes of fertiliser used; with making wiser use of effluent; and with their spending, including on grazing and supplementary feed.
"There will be a greater focus on the return for every dollar they get and for every dollar they put in. It really is a margins business."
Mr Miller expected the number of conversions to slow, but that depended on the price of land.
He said banks had been conservative with forecasting the payout, accepting last year's record $7.90 kg m/s was an exception.
The payout correction had been signalled by Fonterra and should be viewed as that, he said.
