“And with a rapidly increasing number of farmers drying off their whole herds the final production losses are likely to be significantly greater,” he said.
“Our numbers show close to 40% of farmers won’t have enough income from their farm business to pay the bills. That includes interest and rent payments as well as their farm working expenses (FWE).”
Increased stock sales would bolster incomes slightly this year but it is only a small offset.
Feed costs
Earlier this year DairyNZ had predicted the $5.50kg MS milk price would see around a quarter of the country’s dairy farmers unable to cover their costs. But the drought had exacerbated farmers’ financial woes, hitting them hard on both sides of the financial ledger. They’ve been forced to purchase extra supplementary feed and prices for it have soared through the hot summer. They now also face additional winter feed costs.
Newman expected those extra supplementary feed costs would amount to between $30,000 and $50,000 for the average North Island farm. Those who had contracted prices hadn’t been hit quite as badly but they still had to confront the winter feed and next spring’s supplement needs.
At the same time farmers’ incomes have been brutally cut back due to lower milk production.
With the average North Island farm’s production down by 5% by mid-March and 12-13% of a season’s production usually coming in April and May, it was likely many in hard-hit drought regions were facing an overall production loss of 15% or more. For an average North Island farm producing 115,000kg MS that meant a loss in income of close to $100,000 at a $5.80/kg MS milk price.
The loss in income would have been worse had it not been for a bumper late spring that had pushed the country’s milk production to January ahead by 6-7% of where it had been at the same time last year. That flush of milk was significant given the 20011/12 season had itself been a record at more than 11% ahead of the year before.
Newman said some farmers appeared to have hung on, milking cows longer into March where feed was available because it was just too much of a mindset barrier to dry off so early. He expected April would see a lot more herds dried off to protect cow condition and save some feed to get through winter.
Expectations now are that New Zealand’s 2012/13 milk flows will be below last year as production plummeted through March. NZX Agrifax dairy analyst Susan Kilsby said February production was down 5% compared with last February and she expected March to be back 20%.
In Waikato towards the end of March production was back by 30-35% on a daily basis compared with the same time last year but irrigated areas in the South Island were helping to buffer a proportion of production losses.
On the West Coast of the South Island though drought has taken its toll too, drying up milk supply and thumping farmers’ cashflows.
Global impacts
The spike in international dairy prices and subsequent lift in predicted milk price won’t help this season’s financial positions for many. Newman predicted that, even at a milk price of $5.80/kg MS, close to 40% of farmers would still be in the red this season without off farm income.
In late March whole milk powder (WMP) hit record high prices averaging US$5116/tonne for all WMP products and delivery dates at Fonterra’s Global Dairy Trade (GDT) auction in response to plummeting supply but industry analysts cautioned against getting too excited about the lift.
Kilsby said the high prices, which were a hike of more than 21% over the previous auction, were only for a very small quantity of product for near-term delivery in contract periods two and three.
Ultra heat treated (UHT) WMP in contract period two topped the March auction and the record books to that date at US$5465/t. The price curve for product in contract periods for later delivery indicated the soaring prices were likely to be a spike with WMP in contract period six fetching around US$1000/t less at US$4285/t.
The NZX Dairy Futures market also indicates a price spike with settlement prices for July, August and September at US$4600/t falling to US$4275/t in October and November. At the auction held in late March only 500t of WMP was sold for the nearer term delivery contracts.
Analysts were keenly watching results for the April 2 auction where Fonterra had offered similar quantities for delivery contracts out to July but increasing volumes for the new season’s milk for contracts five and six which have delivery periods in August and September. Their volumes increased to 2000t and 1500t respectively.
Skim milk powder (SMP) prices have also lifted but not to the extent WMP prices have.
Kilsby said NZX Agrifax is predicting a milk price for the current season of $5.80/kg MS but is forecasting $6.50/kg MS next season as supply constraints create a flow on impact into the new year.
While NZ has suffered from heat and drought the Northern Hemisphere has continued to be blasted with ice and snow through the spring and worldwide supply is expected to be tight.
Westland Milk Products lifted its forecast for the season to $5.70-$6/kg MS halfway through March and at the end of the month boosted the advance by 20c/kg MS to help farmers with their budgeting decisions.
West Coast farmers will now receive $4.50/kg MS in April and $4.70/kg MS in May with the payment rising around 20c/kg MS each month from then until the final retrospective payment is made in October.
