Dairy farmers told to prepare for worst
As industry body DairyNZ prepares farmers for the consequences of depleting cash flows, a Lincoln University economist has said the fall in milk prices is the best thing that could happen because it will limit European expansion.
DairyNZ have produced a cash flow projection for the coming season which paints a dire picture for farmers.
Chief executive Tim Mackle pointed out that during a typical season, farmers run a negative cash flow until December when things pick up again.
"Farmers are used to having seasonal cash flow that drops into the red but then pops back into the black at some stage during the summer period. However, our current forecasts indicate that many farmers won't be in credit for the entire 12 months of next season unless costs are reduced, income is higher than predicted or some of their overdraft is put into their term debt," Mackle said.
Taking the example of the average farmer starting the season with nothing in the bank in May, he or she would be $100,000 in overdraft by December under DairyNZ's scenario.
"We will be helping farmers to understand how low their own cash flows might go for the 2015-16 season, and more significantly how long they might stay there. We've analysed what it's like for the average farmer in every dairying region and plotted that on a graph. It's not looking pretty," Mackle said.
A second series of nationwide farmer events in DairyNZ's Tactics for Tight Times campaign gets underway next week. The focus is on giving farmers the wake-up call to assess their own situation given the low forecasts.
There is already concern over existing debt levels. Last May the Reserve Bank released figures showing farm debt stood at $52 billion, of which around two-thirds ($32bn) was held by dairy farmers.
Dairy debt was concentrated among a small proportion of highly leveraged farms, with around half of the dairy debt being held by only 10 per cent of dairy farmers.
ANZ economist Con Williams said he did not think the figures would have changed much. The Reserve Bank is due to update them next month.
Meanwhile Lincoln University agribusiness and food marketing programme director Nic Lees said low prices would benefit the New Zealand dairy industry in the long term because kiwi dairy farmers were the most efficient in the world.
"Quotas have come off production in Europe so they are expanding production. Ireland, for example, is planning to increase milk production by 50 per cent," Lees said.
Ireland's goal was to lift production to that level by 2020, and other producers such as the Netherlands would as well, he said.
On the other hand, less efficient European farmers would probably go to the wall.
Lees said there was a cost war going on between New Zealand and Europe at the moment. New Zealand was "the Saudi Arabia of milk - we can be the lowest cost producer, but need to focus on grass-based production to weather the storm".
He predicted high prices would not return soon, and that farmers needed to be profitable at a milk solid payout of $5 a kilogram or they would not survive.
Over the last 10 years the average milk price had been about $5.50 per kg/ms.
"It is likely that this will be similar over the next decade as well. What we are seeing though is greater volatility. This is going to continue so farmers need to have systems that are still profitable when the price is low. The most resilient system is the low input grass-based system," Lees said.
Mackle said while the long term prospects for the industry were still positive, farmers had to remain competitive in a global exporting business where New Zealand's market share could be eroded by other competitors.
"My message to farmers is that resilience is needed so that farmers can cope effectively with the trough in milk prices after the record payment we had in 2013-14. If you haven't already worked through the numbers, it's time to think about setting yourself up to manage through another breakeven season in 2015-16 and look at what will make your business resilient in the longer term if lower prices stay low for longer," Mackle said.