Dairy farmers gearing up for stressful year as milk prices plummet

A Kiwi dairy farmer is warning the industry is in for a tough 12 months with milk prices plummeting, which will hurt their bottom line. 

Fonterra announced a new forecast range on Friday of $6.25 to $7.75 per kilogram of milk solids (kgMS), with a mid-point of $7 per kgMS.

The cuts are expected to leave dairy farmers about $1.8 billion out of pocket.

Dairy farmer and chairperson of Federated Farmers Dairy Industry Group Richard McIntyre told AM on Monday he expects the impact to be widespread.

He told AM co-host Ryan Bridge the next 12 months are going to be really challenging with high-interest rates, high input costs and milk prices, which are well below the break-even point. 

"To add some context, the current break-even milk price is just under $9 and so a $7 milk price is a long way below that and with the average dairy farm producing 200,000 kilos of milk solids, that represents a significant hole that dairy farmers are going to have to try to dig their way out of throughout the season," he said. 

Dairy farmer Richard McIntyre warns a lot of the industry will go backwards in their finances.
Dairy farmer Richard McIntyre warns a lot of the industry will go backwards in their finances. Photo credit: AM

McIntyre warned this will see a lot of farmers not making any profit over the next 12 months. 

"It is a bit demoralising. It's the time of the year as you can see the weather is not always with us, there is a huge amount of work on to look after our cows and our calves and I guess for the majority of us we are going to be doing a lot of work this year to go backwards financially," he said. 

The latest Federated Farmers Banking Survey showed farmers' satisfaction with their bank relationship continued to slip and more perceive they're under undue pressure. 

McIntyre urged banks to take a medium to long-term approach to the viability of dairy farming businesses. 

"The chequebook is fairly well nailed shut, there'll be no additional spending beyond the essential," he said. 

"It will be about getting trusted advisers around you, farm advisors, a bank manager and an accountant and coming out with a plan going forward to see what cost you can cut without reducing income and trying to find a good pathway forward."

He's hopeful this will mean some dairy farms and businesses won't need to shut down as long as they get support from banks.  

"We're really encouraging banks to take a medium to long-term view of the viability of their businesses because there are a lot of businesses that are viable in normal times, but just with very high-interest rates at the moment, high input costs and now this drop in commodity prices, it's just going to make it a really challenging year," he told AM. 

Fonterra's decision to slash its milk payout forecast will wipe about $5 billion off New Zealand's GDP, according to a leading economist. 

ASB chief economist Nick Tuffley told AM on Monday the drop in income for dairy farmers compared to last year will be around $2 billion. 

He said it'll have a multiplier effect, which will see the impact getting up to around $5 billion. 

ASB chief economist Nick Tuffley.
ASB chief economist Nick Tuffley. Photo credit: AM

He said part of the problem is lower demand from China.

"When it comes to buying up milk from us, it's been a case of their production has been pretty strong, but also the consumption has been pretty flat," he said. 

"So they haven't really come back and bought and we make up the difference between what they make and what they want to consume." 

Tuffley believes the impact will be seen in the provinces around the country rather than in the big cities. 

He puts this down to farmers being prepared for a bad season this year. 

"The reality is it's things like less tractors being sold, less repairs being done, less fencing being done, probably less feed being bought and that does ripple through to those communities."

Watch the full interview with Richard McIntyre and Nick Tuffley in the video above.