August was not a good month to be a dairy farmer, with Fonterra slashing its forecast milk payout to $3.85 per kilogram of milk solids, down from its previous forecast of $5.25. This followed Open Country Dairy, New Zealand’s second largest milk processor, who reduced their payout forecast to under $4 in July.
The reasons behind the fall in prices are well known, and are mainly to do with supply and demand - too much supply globally and simply not enough demand. International dairy prices had fallen to their lowest level in the 7 year history of the Global Dairy Trade auction, and at a payout of $3.85, dairy farmers are predicting large losses for the current season. Dairy New Zealand is suggesting that the average dairy farm owner will lose up to $250,000 this season, though this won’t be the case for everyone. Every farmer’s situation is unique and financial results will depend on each farmer’s cost of production, debt levels and the actual production that they achieve.
While farmers are very resilient people, this is a very difficult time for those involved in the industry. Particular focus should go on the following:
- Understanding your current financial position and the areas that need addressing
- Increasing income (through production) where possible, by better farm and pasture management
- Decreasing and deferring certain costs without adversely affecting farm and herd values. Focus on what you can control in the farm business.
- Continuing to pay your accounts on time. Farm servicing businesses are also feeling the pain right now. Remember that they have to pay wages and pay for stock each month.
- Look after yourself and help others wherever possible. Employees will be feeling the strain during this busy time, while sharemilkers and contract milkers will be the same and in addition will be under financial pressure. Ensure you have good support networks in place and advisors you can talk to.
- Communicate often with your advisors, employees, your accountant, bank manager, family and other stakeholders. There is nothing wrong with asking for help and advice.
- Remain positive, but realistic. Don’t be afraid to make hard (but well-informed) decisions, sooner rather than later. Make sure you have a plan.
Many of the farmers that I have talked to are lowering stock rates to reduce feed costs wherever possible. There will be far more focus on per-cow rather than overall production. Most farmers will be taking a targeted approach to fertiliser, which for one season, shouldn’t have too much impact on future production. Capital expenditure and repairs and maintenance will be deferred, and farmers have to be realistic about what personal expenditure they can afford in the next 12 months until cashflow improves. Many sharemilkers will require assistance with the possibility of sharing costs or assisting with cashflow over winter.
Good news may not be too far away, however. Some analysts now believe that the slump in dairy prices might be coming to an end, and this has been backed up with the latest two Global Dairy Trade auctions showing a rebound in prices. The lower kiwi dollar and lower interest rates will also assist New Zealand farmers. Commodity prices are cyclical and indications are that the current season may be one where the final payout ends up higher than what is currently predicted.
Medium and long term the outlook is still positive for agriculture but for those in the dairy industry this season will surely go down as one of the toughest on record. Those that survive (and the majority surely will), will come through this stronger than ever and better prepared for whatever comes at them in the future.