DairyNZ’s latest Econ Tracker shows a better-than-expected outlook for dairy farms this season thanks to improving financial conditions.
The outlook is in contrast to its previous forecast update in June, which predicted a challenging season due to high expenses, DairyNZ’s head of economics Mark Storey said.
“In the past few weeks, we have seen the combination of declining interest rates and improved farmgate milk prices, which creates a more favourable outlook for New Zealand dairy farmers.
“These changes are likely to provide dairy farmers with greater financial flexibility than initially projected for the 2024/25 season.”
Its updated forecast shows a national break-even forecast sitting at $8.09/kg MS while the forecast average payout received has increased to $8.84/ kg MS.
The break-even 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.
“We have seen farm working expenses increase slightly, driven by increases in key operational areas such as electricity, irrigation, wages, and repair and maintenance costs – although the reduction in interest and increase in farmgate milk price significantly outweigh these minor increases, improving the overall financial position of most farmers.”
DairyNZ’s latest Farmer Perceptions survey already showed most farmers feel confident in the financial sustainability of their business, with 60% feeling very confident, and only 10% feeling less confident.
The positive sentiment is also reflected in Rabobank’s latest farmer confidence survey, which found that confidence has risen strongly and is back at net positive levels for the first time since late 2021.
Completed in early September, the latest survey found the number of farmers expecting the performance of the broader agri economy to improve in the year ahead had doubled since last quarter to 30%, while the number expecting conditions to worsen had fallen to 27% from 40%. The remaining 41% of farmers expected conditions to stay the same.
Storey said after having experienced several seasons with tight profit margins, many farmers will continue to feel relief following these recent announcements on milk prices and interest rates, despite a slight cash deficit on average for dairy farms, which reflects that interest costs are still high.
Having experienced several seasons with tight profit margins, many farmers will continue to feel relief following these recent announcements on milk prices and interest rates, Storey said.
“Although, there is still a slight cash deficit on average for dairy farms which reflects that interest costs are still high.”
Farmers will need a payout at least in the high $8/kg MS range to break even, he said.
“The situation is good in terms of that the forecast is in that range. The situation is difficult in as much that you’ll need a very good payout price to be in a profitable position.”
The update showed a scenario that if the interest rate drops from 8.25% to 7.50% by December 2024, compared to dropping to 7.50% by March 2025, it would improve the cash position of the average farmer by $5675 for the current season, relative to the alternative (three months later) scenario.
“We see clearly that earlier rate cuts would result in greater cost savings and a stronger cash position, compared to reductions made later in the season.”
This scenario provides some insight into what interest rate cuts could mean for the remainder of the 2024/25 season but are not to be relied on, he said.
“The improved liquidity from improved interest rates and expected farmgate milk prices can be used to address deferred payments from the previous season, such as repair and maintenance costs, or to pay down short-term debts, ultimately contributing to a more stable and sustainable financial outlook.”
However, while these interest rate cuts will be welcomed, the impact of them will not be felt until the season after, he said.
The Econ Tracker will be updated again close to Christmas.
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