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20 Fonterra boosts earnings guidance Vol 20 No 36, September 19, 2022
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Costs put the squeeze on dairy Staff reporters
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AIRY farmers are sharpening their pencils to protect their financial margins from soaring costs and a milk price that is showing some volatility. Analysis by consultants AgFirst shows farm working expenses have risen 36% in just two years while in August Fonterra reduced its forecast payout by 25 cents following a string of negative GDT auction results. It’s forecast midpoint is now $9.25/kg MS, down from $9.50/kg MS earlier in the season. “So long as the payout is above $9/kgMS that will be fine, but it does mean a somewhat dark cloud on the horizon if the payout drops,” AgFirst economist Phil Journeaux said. AgFirst’s annual Financial Survey in July calculated a 2022-23 break-even point of $8.48/kg/MS to cover farm working expenses, debt servicing, drawings, depreciation and tax. It calculated that farm working expenses had increased $1.56/kg/ MS between 2020-21 and 2022-23. Compared to previous financial squeezes, dairy farmers are in a strong position having reduced total dairy sector debt by about $5 billion. But dairy farm inflation in the year to June was 16.5%, more than
twice the Consumer Price Index of 7.3%. As a comparison, sheep and beef inflation in the year to March hit a 40-year high of 10.2%. Ivan Lines of Agribusiness Consultants in Invercargill said costs and managing risk are the primary topic of conversation with his clients and he is adopting an approach last used when the dairy payout fell to $3.90/kg/MS. Options include fertility testing individual paddocks to better manage application rates and mixes and culling early to reduce feed costs – but also looking to reduce business risk, such as ensuring a stable workforce. The two items facing the largest expenditure costs in the next year are expected to be feed, which is projected to have increased 19% in recent months, and fertiliser, up 30%. The size of some increases has been inflated as contracted price agreements expire. Dairy farmers are also being warned to brace for electricity price rises of over 30% this season as supply contracts are renewed. They could get higher as the electricity futures market forecasts an almost doubling in rates for the 2023 calendar year. While encouraged by the recent 4.9% lift in GDT, Federated Farmers dairy chair Richard McIntyre said there is a need to Continued page 4
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