Darker days for dairy

ANZ economists have cut their milk price forecast to $4.35 per kilogram of milk solids, well below the break-even point for many struggling dairy farmers.

The bank’s downgrade represents an approximate $6.9 billion hit to overall dairy revenue compared to last year’s bumper season.

Dairy prices have finally started bouncing back from the five-year lows plumbed last year, with a 3.6 per increase in the first GlobalDairyTrade auction of the year.

However, ANZ said that was offset by the largest increase in supply from major exporters in eight years, with increased pressure from Europe and a growing domestic milk supply in China.

While oil-dependent nations had been a key source of demand in recent years, the ANZ economists said they were already seeing some pull-back due to collapsing oil prices.

If the forecast proves to be correct, it would be the lowest since 2007’s payout of $3.87, and almost half last year’s record $8.40.

Federated Farmers national dairy chairman Andrew Hoggard said the ANZ forecast was just one view, with Fonterra’s $4.70 guidance still the number to watch.

However, he said it was a sign that dairy farmers needed to be wary and cautious of more downside to come.

“You’d be looking at a seriously large percentage who would probably be losing money at that price.”

Even when the forecast was $5.50, Hoggard said around a third of farmers would probably need to borrow to get through the season.

Farming goes in cycles.  I would hope those that enjoyed the $8.40 payout would have put money aside for a leaner year.

ANZ also forecast a softer opening price for the new season around $5.75.

That meant farmers’ cashflow and ability to balance the books would be tightened “dramatically” over the next 18 months, ANZ said.

“A poor year followed by a marginal one is hardly lights out, but it will create stresses.”

The bank’s economists believed the outlook for the broader New Zealand economy was still respectable, though “hardly stellar”.

Milk prices were expected to gradually recover through the first half of the year, and gather momentum in the second half.

The all-important milk powder category was expected to recover to around US$3300-$3500 ($4250 to $4500) per tonne by early 2016.

No new ute, and maintenance will need to be deferred.  Most farmers have been through this before.  As have their banks.  On the good side, things look like they’ve bottomed out, and the next few years will see opportunities for recovery.

 

– Richard Meadows, NZ Farmer

 


THANK YOU for being a subscriber. Because of you Whaleoil is going from strength to strength. It is a little known fact that Whaleoil subscribers are better in bed, good looking and highly intelligent. Sometimes all at once! Please Click Here Now to subscribe to an ad-free Whaleoil.

  • In Vino Veritas

    Farming does go in cycles. The farmers that will be struggling the most will be those that have converted and budgeted on a certain pay-out when calculating debt repayments. And, it won’t be the first time this sort of thing has happened.

    • David Moore

      And the ones that paid far too much for land based on fatter payouts…

      • Geordie

        Very simplistic, if you took the Corporate farmers (and I don’t just mean the Chinese) out of the equation then land values would never have risen so quickly. Over the last couple of years there has been a huge increase in equity partnership farms, especially in the South Is, through companies like My Farm.
        How these work is you buy a parcel of shares, normally in $100,000 lots, My Farm runs the farms and you are paid a dividend. The problem for these farms is, because they have multiple owners they are limited to the amount of money they can borrow. If the farm runs over their working capital limit, then the owners have to top up their investment. As most of these farms rely on irrigation (already limited) and have high set costs there is going to be some pain for these investors. There are a lot of ex-farmers involved and city based people.
        For the owner operator they have considerably more control over their costs and most farmers I know have paid down debt, even if it was their current account levels, or they have invested on farm (which means they can defer maintenance over the next couple of years).

  • Crookednose

    What gets me, is that it is very common knowledge that if a farmer a year or two ago wanted a loan or similar for expansion or some other development, the banks weren’t interested unless they were going to go hard with dairy.
    Banks better not start being total swines if it gets worse.
    Personally, it’s too much dairy, not enough diversification.

    • Wallace Westland

      That’s right. In my day it was deer velvet then goats, Kiwifruit came along, I remember when everyone started planting potatoes because the year before a wet season had wiped out most of the crops and the price hit the roof.
      Of course the following year it was in the basement.
      Given the way meat prices are going at the moment thanks to the Yanks I’d bet there are more than a few happy sheep and beef (my background) farmers out there. And I suspect wool prices may be climbing too.
      Same thing every time, when everyone jumps on the same bus the tickets get cheaper. (Unless you’re in Auckland of course…then you pay more for new infrastructure!)

  • Geordie

    Definitely has a $4 in front of it, Fonterra was just waiting to see the next result. The Banks are all kept in the loop as to where the price is trending, it looks like the ANZ has just jumped the gun a bit.
    It is going to be a tough couple of years especially with the dry coming so early and irrigation rationed already.
    Well at least the Greens will be happy, where is Russell?

  • Bryan

    when are the media going to get it last year was an exceptional year and most farms base their farm budget on 5.00 payout and take the rest as a bonus yep there are some idiots who have not, but that’s their problem, the new tractor might have to be sold, and now with the bad weather hitting the northern hemisphere their production will be dropping so the demand for ours will rise

  • Jimmie

    One group that will be doing it hard will be the first year sharemilkers. They would have purchased livestock last summer when the payout was high and then got hit by a low payout.

    Their cashflow will be well under budget and they will lose a lot of their equity in their dairy stock. Throw into the mix another summer drought and times will be very tight.

    I heard that there were 6 suicides in December amongst dairy farmers and I know of 1 attempted suicide in January. Not an easy time.

  • sandalwood789

    I feel for the farmers out there (dairy and the others). Both my brothers used to be dairy-farmers and they got hammered in the ’70s by (IIRC) a flood, a drought and then another flood – 3 years in a row.
    Very tough mentally when you’re so dependent on the weather, outside your control.

  • Jafarma

    Not that much corporate activity in the Waikato. Early sales this season indicate buyers (mostly existing farmers) and paying last years prices in spite of a much lower payout. The next 6 months will tell whether this lasts. I’d say many farmers would have taken the opportunity to buy tractors, utes and cars last year when cashflow was good. As has been said, farming is cyclical and replacing high value vehicles tends to occur when payout is good. Conversely I wouldn’t expect this to occur much this year; I reckon it’ll be rather quiet at the Mystery Creek Fieldays in June and most will be keeping their cheque books in their pockets. And farmers have had plenty of warning re a low payout this year, unlike a few years back when the payout suddenly dropped in November when many had already locked in costs for that season.
    If farmers have spent up on capital items in the face of low payout and not made an effort to cut discretionary expenditure then they are going to get a harsh reality check now that the monthly cashflow is starting to dry up.

  • Tom

    And where was dairy farmers when most other people were dealing with overinflated dairy prices?
    Oh thats right, they were creaming it.
    What goes round comes round. Call it what ever you like greed drove it.

52%