DairyNZ chief executive Tim Mackle says the drop means a further reduction of $150,000 for the average dairy farm income for this season. “The harsh reality of this announcement is that Fonterra farmers won’t actually receive $4.25-$4.35 because of the way the payment system works. It’s likely to be more like $3.65,” he says. (see graph below for more details)
“The effect on the level of payments over a season will keep farmers’ cash income constrained for at least the next 18 months and it will take some farmers many years to recover from these low milk prices.
“At a national level the $1.40 reduction means another $2.5 billion dropping out of local economies. This obviously impacts on farmers and their own already stretched business cashflows. It makes it even harder for them to manage their way through. Milk price is now half what it was in 2013/14. We calculate around nine out of 10 farmers will need to take on extra debt to keep going through some major operating losses. For the average farmer you are looking at covering a business loss of $260-280,000 this season but for many it will be a lot more than that,” he says.
“There are a lot of other rural servicing businesses that will be affected too. More than half a farmer’s business income is spent on farm working expenses. Drops like this have a cascading effect through rural economies.
“We have had a number of rural businesses tell us that they are very quiet at the moment and expect things to get even quieter. Times are tough for all businesses in the rural areas,” he says.
“This is the lowest milk price since 2002 and since then farm costs have risen more than a dollar per kilogram of milksolids and average debt levels have doubled – so that’s the double whammy farmers are facing. It is also why we have to help them as much as we can to reduce the costs associated with producing milk. Low interest rates are helping but our analysis shows the average farmer now needs a milk price of $5.40 to breakeven, and this latest forecast is well short of that.
“Farmers know they can’t control the milk price but they have some control over what it costs them to produce their milk. They’ll be doing all they can to focus on profitable production at minimal cost. More than 600 farmers have taken up DairyNZ’s offer of a one-on-one feed review visit so far and they are telling us that advice is proving helpful.
DairyNZ held a meeting with Fonterra and Federated Farmers and the representatives of the major banks today.
“We wanted to discuss what we could do at an industry level and we’ve agreed a few initiatives,” he says. “It’s important banks clearly understand how farmers are feeling and how much is going on across the industry. We’re going to organise regular regional forums to ensure everyone is fully informed of what is happening including progress on the rollout of DairyNZ’s Tactics campaign and the Federated Farmers-led initiative for sharemilkers.
“For sharemilkers we want to ensure we have put enough support behind facilitating conversations with owners to re-negotiate sharemilking agreements. We need sharemilkers in our industry – they are our future – we have to wrap support around everybody working on farms. We all want to ensure rural mental health services and rural support trusts are supported to operate at their best and the banks seem keen to offer help if needed,” he says.
Tim says the dairy industry has contributed enormously over the past five years to regional economies and to the nation – $67 billion in export income since June 2010.
“It’s good to see other sectors stepping up and doing well right now to help regions and rural communities through this tough patch. We need to keep our rural towns going strong while dairy dips. We’re conscious that a lot of businesses depend on the strength and scale of dairy so it’s good to hear that sectors like tourism, viticulture and horticulture are having good growth this year – that should help ensure the viability of rural services and towns.
“We will bounce back – but it may take some time, so other sectors will need to step up to help our economy – and that will help us all get through this together,” says Tim.
Regional impacts of reduced milk price
The estimated drop in farmer income ($5.25 down to $3.85 milk price)*.
Northland - $143 million
Waikato - $692 million
Bay of Plenty - $177 million
Taranaki - $259 million
Hawke's Bay - $24 million
Manawatu - $113 million
Wairarapa/Wellington - $86 million
Tasman/Marlborough - $50 million
Canterbury - $494 million
Otago - $134 million
Southland - $313 million
New Zealand - $2.5 billion
*Based on $1.40 drop multiplied against estimated regional production.
Trends in farm expenditure from 2002 to our forecast for this season
The two largest increases in costs over the last decade have been feed (including grazing) and interest payments. These are also the two largest expense items on-farm. See this graph for an average owner operator: