“Regardless how low milk prices go in this cycle, the message is clear – understand your farm business and determine what you need to do to get through the tough times to enjoy the good times, perhaps in 2017."
Here, Matthew looks at how we've fared during the period.
Dairy farmers should be commended for how well they have responded to low milk prices by demonstrating flexibility and true Kiwi determination. They’ve reduced expenditure across the board, particularly in supplementary feed, repairs and maintenance, phosphate fertilisers, and animal health and breeding.
As a result, average farm working expenses have dropped to a current rate of $3.60/kilogram of milksolids (kg MS), about 75 cents/kg MS down from the highs of 2013-14 when milk prices were above $8/kg MS. Milk production fell only 1.5 percent in 2015-16.
Breaking it down
What the statistics don’t show is how farmers have made efficiency gains by:
- developing financial budgets and regularly monitoring progress
- reviewing systems
- challenging what’s been done in the past
- focusing on growing and utilising more pasture
- changing to higher yielding crops
- achieving cow condition targets at calving
- culling cows early
- using once-a-day milking
- working smarter to make jobs quicker and easier
- making do with resources and tools available on-farm.
At the start of this season it was estimated farmers would receive only $4.40/kg MS in farm income, including milk income received, dividend payments and net cash livestock sales. This would have been well below the cash required by 75 percent of dairy farmers to cover farm working expenses, interest and rent.
The sharp lift in dairy commodity prices through August has increased expected income levels to around $5.50/kg MS. As a result, it is estimated only 25 percent of farmers will require additional funds to meet farm working expenses, interest and rent (the two core cash costs) this season. Please note: drawing and tax payments come on top of this, so overall challenges remain.
More farmers crossing the line
The following graph shows a distribution of farm working expenses, and interest and rent, per kilogram milksolids per owner-operator herd for 2015-16. The two diagonal lines show average cash income levels at $4.40/kg MS and $5.50/kg MS. We have accounted for additional interest payments from increased borrowing as well as reduced expenditure.
The farms shown with green dots (25 percent) were positive from the start of the season; the farms with blue dots (50 percent) move from negative to positive with the lift in milk price; and the farms with red dots (25 percent) remain negative, despite the lift in milk prices.
As the milk price increases, it is inevitable the cost of production will also lift – it is human nature. Plus, many farmers will need to catch up on maintenance they’ve been holding off on. At the same time, input prices such as fuel, supplementary feed, contracting and grazing will increase, which farmers have no control over.
Hold onto the gains
However, let’s not forget all that we’ve learned during this downturn. Dairy farmers have demonstrated an ability to farm more efficiently by choosing the right system, focusing on pasture management and monitoring costs. We now need to hold onto those learnings. Greater efficiency only strengthens our competitive position in the global market.
This article was originally published in Inside Dairy December 2016