11 Dec 2014

Loss expected for most dairy farmers

2:58 pm on 11 December 2014

Industry body Dairy NZ estimates that the drastic drop in Fonterra's forecast milk payout for this season, at its current level, would suck $6.8 billion our of the national economy in terms of lost income from milk production.

dairy farm and farmer

Farmers can cope for now, but the crunch will come in the 2015-16 season, specialist farm accountant Pita Alexander believes. Photo: PHOTO NZ

That is comparing last season's record $8.40 per kilo of milk solids payout with yesterday's revised forecast of $4.70.

Dairy NZ said that, on a regional basis, that would amount to a loss of $1.8 billion in the biggest dairying region, Waikato, $1.3 billion in Canterbury and more than $800 million in Southland.

The loss in Taranaki would be close to $700 million and other dairying regions would also lose hundreds of millions of dollars.

A specialist farm accountant, Pita Alexander, said most dairy farmers would be looking at a loss this season if milk payouts stayed at their current levels and would need a payout of $6 or more to break even.

"It'll depend on their individual cost of production. The average cost of production in our practice, if you look at the working expenses, interest on rent paid, depreciation on vehicles and plant, it comes out just on $6 a kg. That doesn't include the personal drawings for the owner-operators. If you include them, you'll be about $6.15.

"There'll be lots of pull-backs on repairs and maintenance, and some fertiliser and some stock food. But in the South Island in particular, the production levels are such that those areas won't be able to pull back too much - maybe for this season - but not too much for the year ending May 2016, otherwise the overall production base will fall back."

Mr Alexander said most farmers can cope for now, having banked last season's record payout in anticipation of the lower prices. However, the real crunch for many would come in the 2015-16 season.

"At the moment, at $6 some will balance, our average client will make a loss of probably 15 to 20 cents a kg. They can cope with that. It's these $1 per kilogram losses that starts to get hard. And at that sort of level if it came to that, the banks would certainly be communicating closely. In the past, though, the banks have always been very supportive of this sort of situation. This is the down cycle. "

Mr Alexander said the Government is also going to feel the impact of the milk price drop.

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