Farmers are being told to prepare for a milk payout cut as unease about months of lower international auction prices intensifies.
The milk payout is under pressure, says Federated Farmers national dairy chairman and Manawatu farmer Andrew Hoggard.
The forward payout announced by Fonterra for the coming season was $7 per kilogram of milksolids.
But the global auction milk powder weighted average price fell almost 9 per cent in the past two weeks, with whole milk powder leading the drop. The price average had fallen about 34 per cent since February.
ANZ Bank downgraded its own Fonterra milk payout forecast to $6.25/kgMS earlier this month.
Hoggard said dairy farmers should budget conservatively for the coming season.
"Costs to keep the farm running are about $4.50 and then debt servicing is about a $1 per kilogram of milksolids. So even if the payout drops to $6 those people have some head room. But some highly indebted people will have costs of about $6 [per kgMS]."
He said those dairy farmers could run at a loss if the payout fell.
Fonterra's projected payout for the 2014 season has also slipped from a high $8.65/kgMS to $8.40/kgMS.
Hoggard said the markets were volatile and returns to farmers dipped and soared as a result.
He said all dairy suppliers around the globe had had a good production season, so supply was higher.
"China, which bought strongly at the start of the year, had warehouses full and was not buying at auction.
"This fall was unexpected, and it is not good news."
Glen Oroua dairy farmer Christine Finnigan said the price at auction had been trending down for the past few months.
She said most dairy farmers had their feed systems and stocking rates in place and would not change them if the milk payout went down.
Finnigan said that in a low payout year, most dairy farmers were more careful and pulled back on repairs, maintenance and rebuilds.
Labour's agricultural spokesman Damian O'Connor said the big danger was the New Zealand economy depended on dairying and China, in particular, and he hoped neither slumped.
O'Connor said smart farmers were focused on the cost of production, not the amount produced.
"But high land prices and the higher cost of supplementary feed, such as palm kernel, stand-off pads and herd homes, and some people want to house dairy cows - all that comes at a cost.
"We are less competitive as a result and some people will be uncompetitive if the dairy price drops further."
He said Europe and Ireland were ramping up dairy production, which would mean more product on the market and New Zealand prices might fall further.
- Manawatu Standard
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