Up to 30 cents could be shed from Fonterra's $8.65 per kilogramme of milk solids forecast 2013-14 season payout when the dairy co-operative provides an update tomorrow morning, ANZ economists say.
They also suggest Fonterra's opening forecast payout for the 2014-15 season, which is also expected on Wednesday morning, will be conservative.
Fonterra's current season forecast was last changed in February. Then Fonterra increased its forecast Farmgate Milk Price by 35 cents to a record level of $8.65 per kilogramme of milk solids.
It was the third increase in Fonterra's current financial year, which runs to July 31, after the dairy co-operative initially picked a price of just $7.50 last July.
The increase, along with a previously announced estimated dividend of 10 cents per share, amounts to a forecast cash payout of $8.75, which Fonterra says represents $13.8 billion for farmers.
Last season’s final Fonterra cash payout was $6.16 per kilogramme of milk solids.
However, Fonterra's fortnightly dairy auctions so far this year have seen dairy prices drop 22% in US dollar terms and 25% in NZ dollar terms, leading to expectations of a significant drop in payouts for 2014-15.
"We expect 20c to 30c per kg MS of downside to this year’s current milk price of $8.65/kg MS," the ANZ economists say. "The dividend after retentions is expected to be 10c per share, taking the full payout to around $8.50/kg MS for a 100% shared farmer. This will still be a record, but will take some of the cream off the top. On a per-farm basis this equates to annual profit of $3,500/ha, which is nearly three times the average since 2007/08," the ANZ economists say.
They expect the opening forecast for 2014/15 to be "somewhere in the $6.50 to late 6’s range."
"Milk powder prices are still falling and the NZD-USD is high. We expect Fonterra will revise up their forecasts as the season progresses, towards the low-to-mid $7/kg MS range. This expectation is based largely on the upward-sloping price curve for milk powders evident since downward pressure started to emerge on prices. This reflects that our expectation of better prices ahead is widely shared," the ANZ economists said.
A number of factors support this argument, they add, pointing to Chinese import demand being expected to increase once their seasonal milk production peak has passed and they work through accumulated inventory from the first quarter. The ANZ economists also anticipate a slowly depreciating NZ dollar against the greenback over the second half of the season.
"On a historical basis a milk price above $7/kg MS is still very good, and ensures decent profitability around the $2,000/ha mark for the average dairy farmer."
In terms of 2014-15 Fonterra dividends, the ANZ economists expect a better outlook than 2013/14 due to a recent realignment in reference and non-reference product prices, an assumption there will be no more quality/product recall issues, plus improving prospects for Fonterra's Australian business.
"However, one thing to watch closely will be volume growth for 'value-add' products into Asia and other emerging markets, which seemed a little disappointing in the half-year results, especially when margins weren't adjusted for high input costs."
Westpac senior economist Anne Boniface has a $7.10 forecast for 2014-15, and ASB economists a $7 one.
In its Financial Stability Report earlier this month the Reserve Bank said nearly 70% of the $32 billion worth of dairy farm debt is on floating mortgage rates, meaning rising interest rates are likely to increase financial stress for some dairy farmers if incomes fall. The Reserve Bank suggested milk payouts for the 2014-15 dairy season will be "materially lower" than in the current season.
(Update adds charts).
26 Comments
I think its a case of someone else pays, huge moral hazard, but thats OK the likes of Kimy, Big daddy, SK, will be "making" lots of money.
Its parasitic, and its killing the productive economy by taking money out of ppls pocktes and national for one dont care.
regards
The mantra for decades has been "do it smarter" lets assume the obvious, by various mechanisms and need costs have indeed been "smartly" delt with. At some point however face reality, energy ie fossil fuels etc is now 4 to 5 times more expensive than 10+ years ago and is going to stay that way. Add in rising rates, power, labour and as Andrew says a high payout becomes essential for those ppl stupid enough to take on too much debt. Ergo famrs are significantly over-priced for the expected returns. It will correct sooner or later, the Q is who's the last man standing.
regards
The interationalships are mind boggling. Really the only cost that are not "essential" is servicing the degree of debt taken on. Which you can lay at the door of the person taking on the debt.
I really wonder though on say rates for instance, I cant see how the expectation of ever growing bills are realistic but I see no one wanting to answer that one. "its only 5%" etc etc....
regards
xingmowang So what smarter way can we cut costs on:
Rates?
Insurance?
Tax?
Wages?
Levies?
ACC?
Interest?
Accounting? (done in short bursts, often with a family member doing the donkey work)
Legal advice?
Animal Records? (legally needed)
Animal Health??
Fertiliser?
Inputs? (for already grass fed)
Power?
Fuel?
remember that the $2000/ha DOESN'T include any land or building cost/return. for a real figure subtract at least $1.50/ MS/ha. A figure of 850 - 1000 MS/ha is normal under most NZ systems, so subtract around $1500/ha off that $2000/ha. And that's for efficient established farms with 300-450 cows.
Costs are higher for High Intensity farms (they make up for the lower margin by higher productivity, which makes their per hectare look better but the margins lower). Low Intensity farms have higher fixed overheads. (how do you cut down when you only have 1 or 2 staff...)
- Rates?
Applied by council by law, based on capital value of farm. "capital" value is used here to indicate market value and is thus linked to production
-Insurance?
Essential and neglience would be reasonable if not held. We're talking a couple of million in third party risk, in case someone gets on to property and hurts or dies. includes insurances against self or staff accidentally doing something that would contaminate the food supply so must include enough to at least cover an entire tanker load of milk against contamination. Also covers vehicle and electric motors against a wide range of failures due to staff neglect or act of god. Includes Farm buildings and refrigeration gear. Doesn't cover cows, income or life assurance.
-Tax? Kinda important, based on profit and revenue.
- Wages? Good staff are worth gold. And you have to pay yourself. I'm pretty lowly paid by industry standards as I'm still trying to build ("prove") my asset.
- Levies? Industry applied based on production levels, deducted by processor. set by legal bureaucrats.
- ACC? Compulsory, most people take the Worksafe course for the discount, but it's generally a waste of a day for anyone one with half a clue. (thoroughly recommend it)
- Accounting? I use Xero, most farmers use Cashlink, MYOB or Cash/Farm Manager. The main cost is in doing the year-end accounts. A few thousand, but faster than doing it oneself, and big potential legal IRD minefield if it's screwed up. It's more complex than a personal check book or housing portfolio, due to the manufacturing and wages details.
And again, the farm-side/data entry is normally done by a family member instead of external hires and so forms part of the family's income.
- Legal advice? Best kept low, but if you need it you need it.
- Animal records? In itself not a huge number, but is a constant burden, as things like NAIT are legal requirements. LIC or other tracking systems give added value far in excess of their simple record keeping abilities as it assists with identifying better performing animals and those with better probability for superior performing offspring. the computerisation of this process, and the modernisation has hugely increased usefulness and reduced cost. (used to be$25/report and you had to get LIC to program the report for you; now that is all available for a small fee at the user end.) Herd testing can be expensive if you use their staff, but then it's done correctly, massive return on value for identifying mastitis and adding value to a bloodline.
- Animal Health? Better husbandry helps, common sense is a great start. But at times you just need medicines (either homeopathic for the Organics, or other stuff for normal ) or dietary suppliments (eg magnesium, calcium, B12). Cattle need to pregnancy checked, hooves do need care although often thats done by onfarm staff. Calves that are scouring can't just be abandoned. Likewise a ill animal _requires_ treatment by ethical process AND by law.
- Power? a few savings can often be made but the big ones are run times of pumps, refrigeration, length of milking. Cow flow is the answer, but beyond good husbandry, physical adjustment to pland and buildings is very expensive and only gross problems can be justified anyway. Learning things like starting the yard wash at the water exit end, or properly spraying equipment rather than "waving" the water over them (for 10% connect time) can help. I put in some hotwater recovery and solar PV, and already had solar thermal water heat panels, but often the hardware just still isn't up to advertised levels. I was looking at solar PV powered, water-sprayed evaporative cooling assist, plate exchanger between existing creek-water cooler and silo chiller steps, with testing insulating the silo itself; but sadly with the likelihood of not being able to buy the property I won't ever find out what the commercial reality of that solution is.
Vacuum pump changes are available but their real saving is the reduced milking time, which is limited by how fast the staff can actually move! I put in cup removers with auto trigger on the vacuum, to allowed the removal process to decouple from dependency on the staff servicing the animal individually which has helped, however the ability of the equipment to perform consistantly has been frequent issue as is the cost of installation. $1500 per unit, so $30k. expensive when still paying for land and cows.
- Fuel? travelling is greatly reduced since I was younger, and vehicles far more efficient. Have looked at things like copenhagen wheel or electric/PV vehicles. But they are still only at "enthusiast" level of servicability and pricing. A $3500 farmbike is much more viable than a $15000 "Zero", and chances are the 2 stroke fuel is less than the batteries after being affected by farm lifestyles.
- Fertiliser? got to give back if you want to go forward. I've made some major savings, but at cost of production. At the end of the droughts I've still had aprox 1 week feed left in paddock. I'm using about 0.5 tonne of Urea p.a. total for 60/ha at the moment, and about 1000litre pod of nitro based liquid organic fuel (with sulphur). About $12k in capital input fert for that 60ha, and another $7k for 20ha runoff/suppliment block. Higher production requires more fertiliser, but tends to stress the soils more.
-Pest/Weed Control. I forgot that one. there are no short cuts. My lower stocking rate and higher soil fertility is resulting in significant weed growth, especially in warm seasons. the increased fertility is holding par with the pest levels but I'm in a low level for that already. Basically there are a few old-hand management techniques but it's a problem that compounds if not dealt with properly. How much do you want to shave from this budget area knowing that?
Inputs? The biggie. I personally do Balage from runoff/farm at $40-50 per 150 kgDM bale. It's cheaper to do stack style storage, but then I'd need a concrete bunker, proper water handling systems, a wagon to feed it out with and a loader attachment to load it. If anyones doing balage, I'd highly recommend "roto-cutting" the grass when it's cut...much higher palatability. Some high intensity farms buy in more and more feed, great if you've got the staff and the location, but I hear it's a real bugger if something breaks - animals ALWAYS need feeding no matter what the human or financial problems are. Can you really afford 100k worth of gear sitting around just increase a staff person does something that needs a repair?
Interest? The lower the better, but if you buy into the farm, or into a herd, you're either rich already, or you're going to need leverage. I note that not one of those on interest.co.nz that say Interest is wrong or should be 0%, have yet to come forward with the $1M to help assist with the land purchase of this farm (despite all the environmental and financial good I'm doing!)
so for 320k (50,000 kgMS)
acc 1700
health 5000
breeding 6800 (I used 60% sexed semen, so you can half this for most herds)
Fertiliser 1900
Freight 5000 (getting animals to and from farm/runoff + ship spare balage back to farm)
Milking supplies eg sanitiser, twice yearly rubberware replacement per the book 2800
electricity 11000 (we had to go off ripple control because it wasnt turning back on)
repair/maint 23000 (12k on broken tractor gear box, 5k replace effluent pump)
relief milkers 20000
suppliment 39000
weed and pest 1900
admin/general 2500
phone/internet 2500
Insurances 1200
rates 8000
farm lease 96000
wages 40000
interest 6.5% on 122k
One of the difficulties with growing my own suppliment is that I have very little control over timing and volume. I give the contractor a date, and he fits that in with the weather and customers the best he can. I had to supply two tractors and two staff (10hr day each) on top of the quoted figure. But once I say cut, they start at the begining and go until the hectarage is done. One year the first cut got 78 bales (17 hectare), but the following cut got 500 bales off same spot. lower quality, but the cashflow difference is $3500 vs $22000. ouch.
If I have too much growing, I still have to cut and dispose of it. So I'd have to add to my task list find and selling the excess...and if I have excess then chances are so does the rest of the market at that time, making little profit in the exercise.
You are painting yourself into a corner. The only costs that are vital are electricity for the pumps, a bit of maintanence, wages for someone to help you and drench for the cows.
Every other cost is on the assumption that your business will make a surplus.
You lease should be a % of the payout.. A lot of the other costs could be reduced if you cut your numbers.
Get a 'Rural Rates action group', together and all refuse to pay rates untill your farms return to profitability. Think of how you would be farming in the 30's great depression?
Fonterra costs are $2.00 a milk fat solid and farm costs are $5.40, so thats what? $7400 a tonne break even.
Who's moving your cheese?
https://www.youtube.com/watch?v=8uysvx2DKe4
Record high milk prices and slowly receding feed prices are offering strong incentives to milk every cow possible. The April culling report, released this afternoon by the United States Department of Agriculture, shows dairy farmers are doing just that.
In April, dairy farmers sent 38,000 fewer cows to slaughter through Federally inspected plants than they did a year ago. That’s a decline of 14%.
Compared to March 2014, farmers sent 16,000 fewer cows to market, or 6.5%. However, there was one fewer business day in March than in April this year. So on a daily basis, they sent about 11% fewer cows to market—11,714 cows per day in March compared to 10,455 cows in April.
Year-to-date, 117,000 fewer dairy cows have been sent to McDonalds and Burger King. That’s a decline of 10.6%.
Read the full report here.
The 80% need $6.75
http://podcast.radionz.co.nz/rural/rur-mdr-20140508-1235-midday_rural_news_for_8_may_2014-048.mp3
or ex | 08 May 14, 2:14pm$6.75 the new black (minimum)
ex Pita Alexander
http://www.radionz.co.nz/audio/player/2595189
just the first 3 mins worth
http://www.stuff.co.nz/business/farming/dairy/10087766/Sth-Is-dairy-farm-conversions-certain-to-slow
The nutrient issue is going to slow down dairy farm conversions in the South Island almost for certain. Maybe this is a good thing as the benefits of consolidation for a period in almost any industry is underrated.
The milksolid production for an average cow or each grazing hectare on many owner-operator irrigated Canterbury dairy farms has not increased as much as you might think over the past five years. This shows up clearly in our specialist farm accounting annual surveys.
see the farm mags, some covered pad entry offers (per cow cost) prices appear up 10% since January 14. ($500, was $450)
Meanwhile in longer term news crop outputs could well fall due to climate issues,
"Corn yields in the U.S. have become more sensitive to drought, not less, over the past 18 years, according to a study published today in Science. The report warns that if the trend persists, yields could fall substantially by midcentury as higher temperatures subject corn plants to more water stress."
http://news.nationalgeographic.com/news/2014/05/140501-corn-yields-drou…
and the impact on NZ?
regards
A $3500 farmbike is much more viable than a $15000 "Zero", and chances are the 2 stroke fuel is less than the batteries after being affected by farm lifestyles.
Yep, looking at solar etc the killer for a standalone plant or an EV is the batteries. Some of the numbers Ive seen suggest you allow 17cents per kwh as a replacement cost, that is un-economic. A cg=hassis for a car is good for 20+ years these days, even 25...the batteries 1/2 that making the car un-economic to re-battery.
Just how fossil fuel is removed from agricultural production is going to be "interesting" to say the least.
regards
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