Chairman John Wilson said tight financial conditions would lead to many farmers not breaking even, and losses for the average farmer of about $1/kg MS or $140,000 for the year.
DairyNZ estimated about 80% of dairy farmers nationwide would have a loss this season at the forecast payout levels.
Fonterra said last week the cost of its loan support package to farmers of 50 cents per share-backed kilogram of milksolids for production through to December was likely to be $390 million.
Dairy NZ estimated the break-even payout for dairy farmers was $5.30/kg MS, about 40c/kg MS below its earlier reckoning because of a drop in working expenses since May. Research and development general manager David McCall said working expenses on dairy farms had risen 38 cents in the past two seasons and farmers had cut that back in six months as they tightened their belts because of the milk price decline.
He said the actual cash paid out would be closer to $4.15/kg MS because of the way the retro and advance payments worked, with too much having been paid last season compared with the final farmgate payout. That meant cashflow had been extremely tight over winter, leading to an increase in farm debt as farmers borrowed working capital to tide them over.
The Reserve Bank listed dairy farm debt as one of three key risks when it released its six-month Financial Stability Report last month, with the weakness in global commodity markets likely to result in a second consecutive year of weak cashflow for dairy farmers, which could aggravate the sector’s existing high levels of indebtedness.
The country’s five biggest rural lenders – ANZ, ASB, BNZ, Rabobank, and Westpac – were due to report back before Christmas on a stress test of their dairy portfolios requested by the Reserve Bank, although a spokesman said they weren’t likely to be made public until next year.
The central bank also asked the five banks to make realistic provisions to reflect a likely increase in problem loans. Its initial modelling indicated the banking sector’s potential losses from the dairy sector would be manageable, even under a sustained downturn in the dairy payout, but the aim was to avoid as much economic damage as possible.
The impact of El Nino weather conditions on production was one of the factors considered under the stress tests. The economic impact of El Nino depended on what part of the country it hit and for how long.
Fonterra’s current $4.60/kg MS payout was under threat if global dairy milk prices didn’t rise to about the US$3000 a tonne mark. At the GlobalDairyTrade auction on Tuesday night the whole milk powder index increased 5.3%. Fonterra Regular Grade WMP price was up 5.1% to US$2160/t.
