Fonterra’s new season opening midpoint forecast of $8/kg MS means another season of tight budgeting for dairy farmers.
The dairy co-op announced a forecast range of $7.25-8.75/kg MS when it provided a financial update on May 29.
The forecast came as no surprise to Springdale, Waikato, sharemilker Bart van de Ven, who said: “What it means for us, that $8/kg MS midway point, is just another season of tightening the belt.
“We have a low-cost system so we can do it for $6/kg MS [break even], $8/kg MS is pretty good.”
His biggest cost is fertiliser, which has largely remained unchanged over the past year.
“For the average dairy farmer, there’s no fat at all, it’s more likely a loss again. For us, we have set our system up so we can do it with less. We tightened the belts last season and we’ll do it again this season and we should be fine.”
He was surprised at the decision to leave the current season’s forecast unchanged at 7.80/kg MS, given how the GDT has tracked so positively.
The forecast advanced rate paid to farmers was updated, paying $6/kg MS from May 29 to the end of this year before a scaled lift.
Federated Farmers dairy chair Richard McIntyre said the $8/kg MS forecast should see a lot of farmers making a profit this season and he hopes the forecast will rise through the season as predicted by analysts.
“The fact that they are being cautious is good. We know how stressful it was thinking we’re going to get $8 and then for it to go down to $6.75/kg MS in August.
“The last thing we want is for Fonterra to over-promise and under deliver. That said, cashflows are tight on farm at the moment.”
While some may be slightly disappointed it is not higher, having at $8/kg MS midpoint along with the $6/kg MS advance rate is still a morale booster, he said.
DairyNZ head of economics Mark Storey said this is the fifth season in a row when the milk price is above $7 but offset by historically high expenses.
The March update of DairyNZ’s Econ Tracker tool had an average breakeven point of $7.76/kg MS for the new season. But Storey expects that will lift closer to $8/kg MS at its next update in early June.
“For the average farm, that breakeven price would be hitting the milk price, which doesn’t give a lot of margin to cover discretionary spending.
“It’s a pretty tight situation for farmers. While they can probably manage it in terms of operating profit, some will definitely be feeling it in terms of their cash position.”
Operating expenses are forecast to ease but will still stay well above $6/kg MS for the next season according to Econ Tracker. However, non-operational expenses – interest, rent, tax and drawings – are still at very high levels. Dairy Base data put these expenses at 42% of total farm expenditure for 2022-2023, he said.
“Those expenses are becoming a large part of the budget.”
Agricultural economist Phil Journeaux said the forecast means farmers will still not be breaking even.
He calculated that the within-season payment for the coming season when combining deferred and advanced payments is $8/kg MS, which is below his breakeven forecast of $8.34/kg MS.
“We’re still behind the eight ball.”
Fonterra farmers also had a dividend plus capital payment, which will help carry them through the season just finishing and the expected dividend for next year should get farmers over the breakeven line.
“Our investment business is subsidising our farming business. It’s still money coming into the same business, but farming-wise the payout is not enough to cover those breakeven costs.
“Things are still pretty tight.”
In Focus Podcast: Farmers do the sums as farm incomes tighten
Senior reporters Richard Rennie and Neal Wallace join Bryan to talk about Fonterra’s latest milk price forecasts, the frustration at the slow progress of methane inhibitors through the regulatory system and the state of sheep and beef farmer finances
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