Operating costs eat into milk payout
Canterbury dairy farmers are looking at slicing off close to $5 a kilogram of milksolids from their likely record payout for operating their businesses.
The latest calculations by DairyNZ are based on income of about $8/kg with Fonterra's milk price forecast this week at $8.30/kg. Operating expenses includes basic farm working costs as well as adjustments for unpaid management and labour, support blocks and depreciation.
Rising costs shot away in the last high payout in the 2007-08 season and the concern is they will run away from farmers again in another good year. During the 2007-08 season the average cost of production increased by about $1/kg and has remained with farmers since.
On top of this average debt levels for a Canterbury farm are similar to other regions at about $18-$19/kg.
DairyNZ chief executive Tim Mackle said the latest predictions were farmers were heading for operating expenses towards $5/kg with farm working expenses at about $4.40/kg.
"Obviously at an $8.30/kg milk price there is still a good margin, but the Canterbury average debt is similar to other regions at $18-$19/kg. It's come back a bit after peaking three to four years ago at $21-$22/kg as farmers have been able to pay down debt, but with a higher milk price and farm values increasing there is a risk that might bump up again. The risk is debt levels might increase again."
Total borrowings have increased in Canterbury as dairying expands and total milk production continues to increase.
Canterbury now accounts for about 19 per cent or $6 billion of the $32b sector debt.
Mackle said farmers were looking at an average debt servicing level of about $1.40/kg.
"The average debt is going to be $1.40/kg so you have to add that on top of the operating costs. Some farmers will be looking at $2.50/kg and there is quite a range in that $1.40/kg to no debt at all to three times or more in that debt."
He said the organisation was worried that farmers might "take their eye off the ball" in a high milk price as happened during 2007-08 when farmer inflation rose well above the level experienced by other New Zealanders.
Farmers should protect their cost structure to be in a strong position when the milk price drops again, he said.
A concern is that farmers are continuing to use feed outside of pasture despite a good growing season and they are being encouraged to be conservative when it comes to capital investments.
Canterbury farmers face the added difficulty of irrigation hold-ups from the September and October winds with some irrigating systems still out of commission.
Mackle said farmers were more aware of outside factors in preparing their farm budgets and would be taking into account the high levels of corn available in the United States, indicating milk supplies would rise, and market volatility.
He said farmers deserved high praise for the way they recovered from drought last summer, assisted by a warm winter and good management, to quickly get their cows and farms back into production.
Debt reduction will be high on the agenda for a lot of farmers especially with overdrafts drawn down to cope with the drought and cleanup costs incurred after Canterbury storms.