Friday, March 29, 2024

Don’t bank on dairy recovery yet

Avatar photo
Dairy farmers face three months of very low incomes and the possibility of a downwards revision of Fonterra’s farmgate milk price.
Reading Time: 3 minutes

Twentieth-of-the-month July, August and September milk cheques will be small and the season-opening bank overdraft was expected to treble before the spring surge kicked in.

Industry leaders said dairy farmers and their rural suppliers should be under no illusion that spring will signal the end of financial problems down on the farm.

Cashflow forecasts show the average dairy farm will remain in overdraft for a further 18-24 months and recovery will be dependent on plus-$4/kg and plus-$5 forecasts for this season and next.

“Even with a rising milk price outlook farmers are going to be tight for cash over the next two years, barring a significant rebound,” MyFarm chief executive and dairy farmer Andrew Watters said.

When publishing a farm accounting spreadsheet model built by Brent Goldsack, managing partner of PWC in Hamilton, Watters said many in the industry were still making short-term assumptions based on $6/kg milk prices.

When lower and more realistic future prices were plugged into the model for the next three seasons, it showed an extended period in the red for most dairy farmers.

Those who began the season with an overdraft of 80c/kg of milk production, which was not unusual, would stay in overdraft until December 2018, Watters said.

A $100,000-plus overdraft from last season would go beyond $300,000 in September and return to such depths again the following September.

Assuming a $4.27/kg farmgate milk price this season, the best trading outcome that could be expected was a return to the opening overdraft by the end of the season.

Another $1/kg added to the milk price for 2017-18 would eliminate the overdraft by June 2018, after which bank accounts would finally stay positive in the first half of 2019.

“Fifty cents more on the milk price in 2017-18 and the cashflow balance turns positive in February 2018 – 50c worse doesn’t bear contemplating,” Watters said.

But dairy market commentators were contemplating a cut in the milk price forecast imminently, based on the GlobalDairyTrade signs.

ANZ Bank rural economist Con Williams said Fonterra’s $4.25 forecast looked optimistic and a cut in August or September would not surprise him.

“Two key factors are going against the forecast – milk powder prices are down and the NZ dollar up.”

His own spreadsheet generated a 50-70c/kg loss in 2016-17 and he said the second consecutive year of cash losses would be a real challenge for farmers, especially those owners with equity below 30%, and sharemilkers.

“Ten percent of indebted dairy farmers didn’t make money when farm revenue was $5.90/kg so at $4 or thereabouts they face a real challenge.”

Williams said his model included $5/kg for farm working expenses and financial servicing this season.

Watters said the new reality of $4 and $5 payouts required farm working expenses of about $3.50 for owner-operators and $4 for fully-staffed farms.

Most of the MyFarm syndicate farms had dropped back into a mid $3 to low $4 range for working expenses and would break even with a $4.25 payout, he said.

The attitude that world dairy prices would come right and the payout would recover to $6-plus was prevalent.

“A big group of farms remain set up to be profitable at $6 but I think the right attitude now is to plan for the worst but hope for the best.”

Goldsack concurred, saying many dairy farmers were not aware of how long it would take them to recover with $4 and $5 payouts.

His three-year graph projection had caused a lot of comment wherever it had been shown.

“It shows that cashflow next spring will be the same as this spring.

“No-one knows how dairy prices will behave but I don’t think $6 will be here by season’s end.

“So the most sensible course is to structure our own businesses to be sustainable at those lower payouts.”

Federated Farmers dairy section chairman Andrew Hoggard said the three-year projection was a wake-up call to the industry.

“Dairy prices going up are not going to fix everything.

“When we get out of this hole we should be rethinking what is a smart level of debt.

“In the recent past, price volatility has brought the upturns as well as the downturns but now we are in a third season of losses.

“You may be able to get the cost of production down to $3.50 to $4 but adding $1 in debt servicing just makes it so much harder.”

Total
0
Shares
People are also reading