Relief at last for struggling farmers

With more than half their milk collected, farmers have had to struggle along so far this season receiving just $3.85/kg MS. They hadn’t been expecting any respite until March, when the advance payment had been due to lift to $4/kg MS. The $4.25/kg MS was not expected to be paid until May, just as the season draws to a close.

But the 40c top-up announced just before Christmas will be applied to all the milk they’ve supplied this season until the end of November, with the new advance rate paid later this month on their December milk.

For an average-sized farm producing about 130,000kg MS that will mean about an extra $20,000 coming into the account this month on top of the December milk cheque.

There will be extra in April payments too, which will come from the interim dividend, although the milk price payments will remain at $4.25/kg MS.

Fonterra confirmed in December it was still on track to make a distributable profit of 40-50c/share this season, which is similar to last season’s profit. The co-op’s policy is to retain 25-35% of that and if it makes similar payments to last year farmers – and this year Fonterra shareholder fund unit holders – are likely to receive about 8c/share as an interim dividend payment.

Farmers won’t see any further boost to milk price advance payments until June, once the season is over, when the advance is set to increase to $4.40kg MS.

After that it’s a steady rise toward the final forecast of $5.50/kg MS – up 25c on the co-op’s predictions earlier in the season.

Wairarapa-based specialist dairy consultant Chris Lewis, of Baker and Associates, said that while the 25c lift in milk price forecast was welcome, it was the news of the 40c hike in advance to be paid in January that had farmers breathing a sigh of relief. While conditions would still be tough it should help bring people back to thinking more clearly, which was a change from the disaster management mode some had been operating in.

“I’d started to see some people making questionable decisions, such as sharemilkers not keen to keep staff on through to the end of the season and fertiliser not going to be applied when it was needed,” he said.

The boost in income was unlikely to lead to any sudden decisions to carry out extra spending but it should help people carry out the activities and make the purchases they knew they should be making.

Canterbury-based dairy consultant Jeremy Savage, from McFarlane Rural Business, said farmers had largely come through the misery period earlier in the season, when they had been forced to extend their overdrafts to get through the tight cashflow period and meet tax commitments.

He said about half his clients had been in that position. They were still behaving conservatively but were feeling more positive now about the future and the 2013/14 season.

DairyNZ economist Matthew Newman agreed that the lift in advance would help reduce the reliance many farmers had been forced to have on their overdraft. However, a large number of farmers would still be struggling despite the 25c/kg MS lift in the forecast milk price for the overall season.

At the previous forecast of $5.25/kg MS a quarter of the country’s farms would have found it difficult to meet farm working expenses (FWE) and interest and rent payments, before drawings were even taken out, he said. The increase to $5.50/kg MS was likely to ease that situation slightly but he still expected 15-20% of farms to be in that situation this season.

A high number would still be close to or just above break-even. DairyNZ estimated FWE for this season at $3.65-$3.70/kg MS.

On a true financial year basis – with part of last season’s payout (milk price plus dividend) included in income along with stock sales – DairyNZ is forecasting an income of $6.20/kg MS.

If FWE is $3.70, that leaves $2.50/kg MS from which to cover interest and rent, pay tax and take drawings.

Newman said interest averages $1.40-$1.50, while tax payments are expected to average 20c/kg MS. Drawings typically average about 70c/kg MS, leaving just 10c/kg MS as a net result.

“Remember that’s an average, so half of the country’s farmers will be under that,” he said.

On a more positive note, NZX Agrifax is still predicting an improvement in milk price for next season, with an expectation it will lift above $6 again and sit at about $6.16/kg MS. This season it still thinks there is some upside to Fonterra’s forecast putting the milk price at $5.60/kg MS.

NZX Agrifax dairy analyst Susan Kilsby said milk production across the main dairy exporting regions – the United States, European Union (EU) and NZ/Australia combined started to decrease from September, with estimates it was down 1% year-on-year during September and October.

NZ has been the exception, with strong milk flows through the first half of the season.

With the peak past and summer conditions prevailing, milk production increases will ease through the early part of the year.

The supply contraction across the globe had been caused by high feed costs relative to milk prices, Kilsby said. There had been no significant fall in demand and from June to October NZ exported 45% more whole milk powder (WMP) than it did during the same period last season. Exports to China and Hong Kong were up 143% over that period, which meant China had sufficient product on hand to meet immediate requirements.

Chinese buyers were buying only what they needed rather than excess volumes that would otherwise push prices up, Kilsby said.

However, skim milk powder (SMP) was a different story. SMP prices had risen this year because of the expectation global supply would tighten as milk production in the world’s two biggest SMP exporting regions, the EU and US, slowed. (NZ is the world’s third-largest SMP exporter).

While volumes of SMP on global markets continued to grow until late in 2012 (third quarter 2012 export volumes from the five main

dairy exporting countries, NZ, US, EU, Australia and Argentina, were up 10% year-on-year), stock levels within the US and EU markets were currently low.

SMP production in the EU was starting to fall behind last year, with large falls in SMP production recorded in some countries, including France and Ireland, she said. Official figures for August showed SMP production was nearly 5% lower than August 2011 across the EU-27 countries.

In the US, milk production growth, which has been marching ahead month on month since February 2010, finally fell behind in August and September, although October figures showed it had nudged ahead again.

Kilsby said growth rates had slowed the most in California and south-western states, where a significant proportion of export product comes from.

Because of the supply difference SMP has been trading at a US$100/tonne premium over WMP, the reverse of the historic price differential. She didn’t expect this to correct until milk production in NZ declined and WMP supplies tightened.

Expectations are for commodity prices to firm in 2013 and all eyes will be on NZ production levels through the summer and autumn.