Gloom around farmgate, despite payout lift
The mood down on the farm remains sombre, despite an encouraging lift in dairy prices in the past two months.
Dairy farmer Craig Maxwell, who spoke to the Herald in August last year, said farmers are feeling a bit more confident these days.
Maxwell, whose sharemilker milks 500 cows on his farm in Paparimu just south of Auckland, was reeling last year after Fonterra announced a $ 3.85/ kg milk price.
“People have been asking, ‘ How are we going to survive?’ It is basically battening down the hatches to get by until it improves,” he said then.
Today, the forecast farmgate milk price is $ 4.75/ kg, upgraded by 50c in August. With an anticipated dividend from Fonterra, the payout this year will put farmers in the black, but not by much, given DairyNZ’s estimated break- even point is just $ 5.05.
There has been a big shift higher in international dairy prices in the past couple of months, but farmers remain guarded after a similar- sized spike last year proved to be short lived.
“The last few discussion groups that I have been to have been pretty sombre,” Maxwell told the Herald this week.
“They are not making money,” he said. “They are just keeping things ticking over, hoping that the price will keep increasing.”
Maxwell said a couple more seasons like the one just passed would see a lot more people leave the sector.
But farmers like Maxwell understand the odds, and where New Zealand fits in the grand scheme of things.
The New Zealand’s dairy industry in unique in that it exports most of its production: 95 per cent. Its competitors have inwardly focused dairy sectors, aimed primarily at feeding their own populations. For them, the export trade is secondary.
In contrast, New Zealand i s responsible for about 30 per the world’s internationally traded dairy product.
That means New Zealand farmers stand to win big time when world prices spike as they did in 2013 when wholemilk powder prices hit US$ 5245 a tonne. But local farmers, without a domestic market of any size to fall back on, feel the pain more acutely when world prices fall.
Maxwell said the sector had navigated its way through low prices before.
The difference this time around was the sheer duration of the downturn.
Two seasons in a row, or three, if the current strength of the market was not maintained.
“We feel it first, but we know that,” Maxwell said. “It’s just the duration of the low point that is the problem.” A big lift in earnings, with low milk prices helping to drive margins higher. Progress in what Fonterra calls turning the wheel — diverting more product away from its commodities and into its valueadded businesses. Fonterra’s consumer and food service business had a stellar run in the first half of the financial year, with earnings rising by 108 per cent. Will the trend continue in the second? Fonterra has spent up large in recent years building new plant and on buying a stake in China’s Beingmate, which has seen its debt spike higher. Investors and the ratings agencies will expect to see Fonterra’s debt fall to more conservative levels. Fonterra’s loss- making Australian operation has long been a problem for the co- op. The company has sold businesses and invested heavily in others. Milk prices there have also fallen — albeit belatedly — which should give Fonterra an extra boost. Will it be enough to put Fonterra Australia back in the black? Beingmate, which is 18 per cent owned by Fonterra, has run into a rough patch due to more upheaval in China’s infant formula market. More broadly, the question is how is Fonterra faring in China now that economic growth there is coming off the boil? The geopolitical scene plays a big part in Fonterra’s wellbeing. Are low oil prices affecting Fonterra’s markets in the Middle East? Will the Russian trade embargo lift? European dairy production — will the decline continue? Earnings are up, and so are world dairy prices. Fonterra’s costs have been cut dramatically. Is Fonterra on a path to increased earnings in the current year and beyond?
The last few discussion groups that I have been to have been pretty sombre. Craig Maxwell, dairy farmer