6 Aug 2014

Milk price could skewer some farmers

7:02 pm on 6 August 2014

A leading rural accountant says some dairy farmers could be in trouble, if world dairy prices and milk payouts keep falling.

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Photo: RNZ / Diego Opatowski

Pita Alexander said farmers with high levels of debt and those at the lower end of the production scale would be the most vulnerable to any further price drops.

He said Fonterra's current payout forecast for the season, $6 for each kilogramme of milk solids, plus a 20 to 25 cents dividend, effectively added up to about $6.65/kg, because of residual payments from last season and other factors.

And at that level, he said most farmers would still get through.

"At the moment, the payout including dividend, retrospectives, capacity adjustments is about $6.65/kg. That's what Fonterra has estimated for the current season. I've only allowed for 15 cents in that figure for a dividend.

"If you allowed higher you would be a bit higher again. So anything less than the $6.65/kg, $6.75/kg is starting to get serious for some."

Two groups 'at risk'

Pita Alexander said any further price slippage was going to put two groups of farmers in particular under real pressure.

One of those was farmers who were paying more than $2 per kilogram of their milk return in interest or rental payments.

"So, if they had a production figure of 400,000 kilo of milksolids and they were paying $2 per kilogram that would mean they would be paying annually $800,000 of interest.

"Now, there is quite a few in that group. They've often got very good scale. They would be milking more than a thousand cows probably or up near there.

"They often have high working expenses though, as well. So that group could well be affected quite quickly, particularly if Fonterra slips further," he said.

"The other group that could be affected is a much lower-scale group, where their farm working expenses are quite high. Often that group are good feeders of stock, but their profitability would be affected very quickly with a lower milk payout."