Exports

Dairy farmers riding the milk pay-out roller-coaster

Wednesday September 24, 2014 Mark Cox

The Fonterra Annual Review 2013, which was published alongside its Annual Report on 24 September 2014, confirmed that 2013/14 had been a bumper season, with a final pay-out of $8.40/kg of milk solids. However, at the same time it forecast a pay-out of just $5.30/kg of milk solids for the 2014/15 season.

 

For the average dairy farmer with a herd of just over 400 cows, each producing around 350 kg of milk solids a year, this could mean a reduction in income of around $430,000 between the two years. With national production of around 1.7 billion kg of milk solids, the reduction in rural incomes in 2014/15 could be $5.25 billion.

 

Early season forecasts of the milk solids pay-outs tend to be cautious, but dairy farmers are facing a difficult year, even if the eventual pay-out climbs from the $5.30 level. The statistics are now a little dated, but the Ministry of Primary Industries estimated that, in 2011/12, the median dairy farm required a pay-out of $5.64/kg of milk solids to break even (i.e. cover its working expenditure, debt servicing, depreciation and drawings).

 

However, this does not necessarily imply that large numbers of dairy farms will go under. Farmers are nothing, if not resilient; and they have some scope to reduce their outgoings. Moreover, they are fairly experienced in dealing with widely fluctuating milk solids pay-outs. As the chart below indicates, the pay-out adjusted for inflation has exceeded $8 three times since 2008, only for the pay-out to fall sharply the following year. And, if the eventual pay-out for 2014/15 climbs back to $6, it will be around the long-term inflation-adjusted average.

 

inflation adjusted dairy price payout