Dairy price slump to hurt new sharemilkers
Dairy newcomers will be the most vulnerable to dairy prices hitting a two-year low in the latest auction overnight, an industry representative says.
But the impact could be managed, and there could be a silver lining in the effect on land prices, Federated Farmers sharemilkers' section chairman Neil Filer said today.
New entrants to sharemilking will have taken on high debt and be exposed to prices dropping 8.4 per cent at Fonterra's GlobalDairyTrade (GDT) auction, especially as the co-operative cut its milk price payout forecast for farmers by $1 a kilogram of milk solids to $6/kg a week ago.
The big slide is the second consecutive auction drop after prices fell 8.9 per cent three weeks ago.
Had new sharemilkers entered the business during last season's record $8.40/kg they would be sitting pretty, but fortunes have turned quickly.
Sharemilkers run a dairy farm on behalf of a farm owner for a share of the income, owning the cows and equipment but not the land.
Existing sharemilkers are in a much better place to cope with the downturn and appear to be taking the volatile dairy market in their stride.
Filer said dairy farmers were not panicking as that would get them nowhere and they had seen markets rise and fall before, but it would be hard on newcomers.
"It's not new territory and I remember about three to four years ago we had a massive drop in a mid-December milk auction if we look back at GDT," he said.
"We were told this was coming and it's on the back of a high payout so existing sharemilkers will be good, but new entrants will be vulnerable and these are the guys we worry about as they come with high debt and a first year in a low payout."
The writing had been on the wall that dairy prices would come off the boil and it was not a surprise to see the auction correct itself, said Filer, a Dannevirke variable-order sharemilker.
He said sharemilkers would keep an eye on the numbers and look to maximise all their pasture and restrict bringing in outside feed to be "super efficient" in a low-payout season.
Existing sharemilkers would have the benefit of surplus cash from last season to buffer payout differences.
Filer said sharemilkers might have to capitalise on their overdrafts later in the season if the low milk payment held, but they had been in this position before and were used to adapting businesses around volatility.
"If you want to stay in the game you have to learn that real quick," he said.
Cow prices have held up reasonably well despite the price reaction to more milk on the market from other countries having good seasons, and big buyers such as China carrying more milk supplies than previously.
Filer said the fall in dairy prices could have a silver lining as it might "shake-up" land prices.
"There is always a silver lining and sometimes you have to look harder to find it."
Sharemilkers would find a way of making their businesses work whether it was a low or high payout, he said.
New Zealand Sharemilker of the Year Charlie McCaig, in his first season as a 50/50 sharemilker in South Taranaki, said that while the overnight tumble was disappointing, farmers did not need to panic yet.
"It's still early days - there's a long way to go yet," he said.
"Things could swing round quite a bit."
He said there was an assumption within Fonterra's $6 forecast payout that GDT prices would firm later in the season.
"It's not doom and gloom just yet," he said.
McCaig and wife Jody tried to run as low a cost structure as possible.
"The more we see things slide, the harder we'll look at the budget," he said.
"For example, we might delay some purchases until next season."
The average winning price at last night's auction was US$3025 (NZ$3573) a tonne, more than 40 per cent down from the latest peak of US$5042 on February 4. Dairy prices have fallen at 11 of the last 12 auctions and the GDT price index is at its lowest level since August 2012.