Break-even cost pared back as farmers lift efficiency

MEDIA RELEASE

Tuesday 2 August 2016
For immediate release

DairyNZ: break-even cost pared back as farmers lift efficiency

Industry body DairyNZ says the increased dividend and the maintained $4.25 per kg MS Fonterra Farmgate Milk Price is some good news for farmers with shares.

But another positive is also emerging – New Zealand dairy farmers have sharpened their systems and reduced costs through this sustained low milk price period.

DairyNZ chief executive Tim Mackle says while the milk price will continue to keep pressure on farmers this season, the industry’s performance in cost-cutting on-farm means break-even costs have been reduced.

“We’ve revised our break-even milk income required for the average farmer in 2016/17 to $5.05 per kg MS,” says Mr Mackle. “It was $5.25 per kg MS for 2015/16 and $5.77 in 2014/15.”

The break-even cash price includes farm working expenses (excluding adjustments for unpaid management and depreciation), interest and rent, tax and drawings; and nets off livestock and other income received.

“The reduced milk price has meant farmers have really fine-tuned their management and analysed their costs of production. This should bring the average farm working expenses back to an anticipated $3.55 per kg MS this season, the lowest level since 2009/10.”

Farm working expenses were sitting at $4.07 per kg MS in 2014/15, so the reduction has been equivalent to around $100,000 per farm, on average.

Mr Mackle says reducing the break-even price is tremendous recognition for New Zealand dairy farmers and the resilience they have shown.

“Being able to reduce the break-even milk price tells us that dairy farmers have cut costs further than we thought. This cost control is resulting in more efficient dairy businesses, which is key to resilience.”

Despite the $5.05 per kg MS break-even milk income required for the average farmer, under the current forecast farmers will receive around $4.50 per kg MS all up in terms of milk income, including retro payments from last season and dividends (including the lift in dividend announced yesterday).

“Obviously there is still a shortfall there – and while there are farmers operating above that $5.05 level, there are many with break-even incomes below that too. But a $4.50 income and reduced farm working expenses means farmers won’t need to borrow quite as much,” says Mr Mackle. “But let’s be clear, this is still very tough for our farmers as it’s been a sustained period of low milk price.

“Every farm runs a slightly different system, with different costs and needs. Many will have been through the process of fine-tuning their budgets, but maintaining that momentum and always looking for efficiency opportunities is key.”

Tactics campaign supports farmers
DairyNZ’s Tactics campaign continues to support farmers through field days which will be underway in September and October. These Tactics for Spring events will help farmers extract maximum value from their pasture.

“Pasture First is a message we are promoting with farmers. Our research shows pasture drives in excess of 85 percent profit for most farms at a $7.00 per kg MS milk price, but 98 percent at a $4.00 milk price. So it makes sense to get our focus clearly set on managing this important feed source well – we’ve got to make the most of it, particularly this spring,” says Mr Mackle.

“While increasing revenue is important, it’s even more important to keep hold of as much of it as possible. This means running a tight budget.

“Following on from the huge interest in this area last year, farms with a low cost of production have opened their books once again and revealed their 2016/17 budgets – enabling other farmers to improve their own business, by comparing themselves.

“It’s this information sharing which is so important and we will continue to work with our farmers to get through the low milk price cycle.”

-ENDS-

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