Fonterra’s lift in its milk price is behind a massive turnaround in dairy farmer fortunes in the space of a few months.
Fonterra’s 50 cent lift in its milk price forecast has put dairy farmers are back in the financial black.
The increase on September 25 lifted the forecast to a $9/kg MS midpoint and a price range of $8.25-$9.75/kg MS.
AgFirst agricultural economist Phil Journeaux said it will make a huge difference to the financial situations of Fonterra farmers.
“Basically, we have gone from the red to the black.”
An updated version of AgFirst’s Financial Survey data from July had a break-even payout within the season at $8.55/kg MS on an $8.85/kg MS payout – a $0. 31/kg MS surplus.
In July, that budget had a 39 cent loss.
“Back in July we were budgeting to pay off debt, but we weren’t certain we could do it. Now we can and we’re still in the black so I think you’ll see an increase in spending on farms – maybe some R&M, capital replacement.”
The annual survey uses a farm model based on the of 25 surveyed farms across Waikato and Bay of Plenty. The 2024 model, which originally had a $85,000 cash deficit, is now $11,000 assuming the $9/kg MS forecast holds and not including a dividend.
“The increase in the advanced payment is almost a dollar and it’s made a hell of a difference, especially on October 20 because they will get the increase in the advance rate and the dividend,” he said.
Farmers have been running down some of their infrastructure and equipment and that could mean some seek to replace these at their local dealerships.
Interest rates are also dropping with the expectation being they will drop further. For now, he would drop interest rates on debt by a quarter of a percent which equates to 5-6 cents per kilogram of milk solids.
It is a huge turnaround in financial fortunes in a couple of months, he said.
Given the improved outlook, favourable calving conditions throughout much of the North Island and Fonterra’s strong financial position, he suspects farmer morale and confidence have also markedly improved.
DairyNZ’s head of economics, Mark Storey, said for the average farmer, the revised revenue forecast means they will have a cash surplus ranging from 0$.15-$0.25/kg MS including dividend payments.
Prior to the lift in forecast, that figure was a $0.03/kg MS deficit.
“They are back in the black, on average, and it’s been an adjustment of 10-20 cents in terms of cash surplus per kilogram of milk solids.”
Operating profit margins are also looking a lot healthier. The only caveat is that it is still early in the season, and does not include possible interest rate falls, he said.
Te Aroha dairy farmer and accountant Melissa Slattery said the lift in the advance rate from $5.10-$7/kg MS for October made a huge difference. It hit farmers’ cashflow straight away and will make a huge immediate material difference to their circumstances.
“$7/kg MS isn’t that far off what we got paid full season last year. We’re getting a healthy chunk of that early, which is fantastic.”
Fully shared-up farmers will also receive last season’s dividend at that stage on top of that advanced payment.
Slattery expects much of the extra cash will be used to pay down debt as well as repairing or replacing any equipment or infrastructure that was held off over the past few years.
“It’s definitely going to be a positive on the cashflow and a massive swing in overall profitability. It’s a material shift and it’s going to make a huge difference.”
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