DairyNZ says a combination of higher income and reduced interest costs will result in 'a substantial increase in cash surplus' for the country's dairy farmers

The country's dairy farmers will be looking at "substantial" increases in cash surpluses for the current season, according to DairyNZ, the sector organisation representing New Zealand's dairy farmers.

DairyNZ's forecast of payout for farmers in the current season now stands at $10.08 per kilogram of milk solids (kgMS) versus a forecast national breakeven price of $8.32 per kgMS, head of economics Mark Storey said.

"...That’s potentially $1.76 of cream on top for farmers, which is well above the profit margin of recent seasons," he said.

Giant dairy co-operative Fonterra recently hiked its forecast range for the farmgate milk price to $9.50 to $10.50 - so, giving a 'midpoint' price of $10kgMS, which would be a new record. And Fonterra also maintained its 40-60 cents per share earnings forecast for the financial year.

Fonterra's existing record farmgate milk price is $9.30 in the 2021-22 season. 

DairyNZ's forecast average payout is based on the estimated milk receipts for the specified season, along with dairy company dividends. The breakeven milk price is the milk sale price per kilogram of milksolids to cover a farm’s costs in a season, excluding capital expenditure and principal repaid on loans.

"I suspect that Christmas came a bit early in some dairy farming households following multiple positive announcements in recent months," Storey said.

"The GlobalDairyTrade auctions have seen a steady demand for all dairy products, which has positively influenced dairy prices, while reductions in the Official Cash Rate (OCR) have decreased interest expenses, providing financial relief and improved profitability for our farmers.”

DairyNZ highlights this with its "Econ Tracker Tool", which among other things provides detailed financial estimates based on farm median figures. 

Based on the latest figures, DairyNZ estimates for the current season an effective 164 hectare farm with a peak 454 cows milked will generate (and I have rounded the figures they provide) net dairy income of nearly $1.95 million, up from $1.55 million last year, while the cash operating surplus will be $938,000 versus $587,000.

After tax and other expenses this will leave 'discretionary cash' of $540,000 (last year $219,000) and then after deducting 'cash available for living and growth', there's a cash surplus of just under $113,000 - compared with a cash deficit of over $8,500 last year.

DairyNZ said that since making its initial forecasts in June, the average national forecast payout received has increased by 21% to $10.08 per kgMS, while farm working expenses have remained relatively stable, with a small 4% increase since June. This is reflected in a 3% increase to the forecast breakeven milk price, now sitting at $8.32 per kgMS

"Farm working expenses are forecast to increase marginally to better reflect what is happening on farm, including slight increases in key operational areas such as electricity, wages and insurance," Storey said.

"A portion of this increase is attributed to deferred costs from the tight times in previous seasons, as farmers look to catch up on deferred repairs and maintenance.

“Despite the slight rise in expenses, the combination of higher income and reduced interest costs will be resulting in a substantial increase in cash surplus. This indicates a stronger financial footing for farmers, providing them with greater liquidity and the ability to  reduce debt or undertake essential capital projects depending on their individual  situation," he said.