Wairarapa-based dairy consultant Chris Lewis of BakerAg says the way advance payments have been scheduled means farmers won’t necessarily need to alter their seasonal financing requirements compared with what they’d planned for at $4.50/kg MS. At the time of the announcement Lewis called it “bad news, well-dressed” because the advance rate schedule pulled a greater proportion of the payout into the pre-Christmas period.
He’d run cashflow models for clients before Fonterra announced its new season forecast on May 26 and had based those on $4.50/kg MS and a typical advance rate schedule. With the actual numbers now available some have been concerned the lower forecast milk price would mean they’d have to go back to the bank to see them through the early part of the season.
“But even with the drop, our numbers show that for our clients, the amount of seasonal finance they’ll require shouldn’t be any greater than it was.”
That’s despite the opening base advance payment of $2.50/kg MS for June and July milk being the lowest opening price for 14 years. The capacity adjustment of 51c/kg MS brings the early season full advance to $3.01/kg MS. But Lewis said that quickly rises and peak milk will receive $3.30/kg MS compared with last season when October milk received $3.10 and November milk $3.15/kg MS.
Farmers’ cashflows are also better during the early part of this season than they were last season because there will be retro payments though July to October – albeit small ones – and 10c/share of dividend would be paid on June 7 with the final dividend payment, also expected to be 10c/share, paid in September.
Lewis said the in-season result for clients in the lower North Island was about -$45,000. That compared with -$120,000 for the 2015-16 season.
“So yes, while it’s another season of a sub-par payout, and that’s not good, the early season cashflows aren’t worse than we’d forecast and the in-season result is going to be better than it was in 2015-16.
“A fair chunk of the New Zealand dairy industry, while under pressure, should be able to manage their way through the season.”
But for those who had struggled to bring farm working expenses down or those with high debt the continuing low forecast was likely to mean they’d be coming in for even greater scrutiny from their banks.
Lewis urged farmers to work with their banks and advisers in a positive way.
“In my experience of working with people in that situation, working with them gets you a lot further than trying to resist them,” he said.
For Westland Milk Products suppliers it was unlikely there would be any retro-payments through the winter following the co-operative’s decision to lower its 2015-16 forecast by 10c/kg MS to $3.80-$3.90/kg MS. Its advance is already at $3.80/kg MS.
Westland chairman Matt O’Regan told suppliers the company would be making every effort to enable winter payments or retro payments from July to September. But at this stage Westland suppliers wouldn’t receive any top-up on payments made for the 2015-16 season until October.
The co-operative does appear, though, to be more optimistic about the coming season than Fonterra with an opening advance of $3.80/kg MS for the 2016-17 season. It’s also forecasting an operating surplus available for payout for the new season of $4.55-$4.95/kg MS.
Westland’s payment schedule steps down from December to the end of the milking season in May 2017, with advance payments through those months set at $3.60/kg MS, indicating just how uncertain the outlook is for when global dairy prices might begin to recover.
DairyNZ economist Matthew Newman said the expected average shortfall nationwide for the coming season would be between 70c and 90c/kg MS.
That was taking into account milk and stock income less interest and rent payments combined with farm working expenses. Deficits in Canterbury and Southland were expected to be larger than in the North Island because of the larger size of farming operations in the South.
He said average farm working expenses had come down to $3.70/kg MS this past season which was a significant adjustment from $4.33/kg MS in the 2013-14 season.
Reducing costs further would be difficult for many and much of the final result for the coming season was likely to rest on how the season played out climatically. Interest and rent payments were at $1.45/kg MS within DairyNZ’s model which meant the average break-even was $5.25/kg MS.
