The possible milk payout forecast by DairyNZ CEO Tim Mackle, based on Open Country, of $4 per kilogram of milk solids has the potential to hit the average dairy farm by $250K according to KPMG analysis.
It's assumed Fonterra will lower their forecast to a similar level tomorrow.
This projected price level will sorely test farm system resilience and confidence according to KPMG Farm Enterprise specialist Roger Wilson.
“The Individual impacts will vary depending on farm system and debt.” says Wilson, “The outlook is tough but this is the time to apply some science and really examine the options.”
A lot of farms are actually adaptable and resilient and the smart farmers can be very responsive even in the short term. With stronger beef prices farmers may look at incorporating an element of dry stock farming, particularly if dairy herd sizes are reduced.
The KPMG Farm Enterprise team are already seeing proactive farmers using a combination of reducing the use of supplements and fertiliser, and lowering stock numbers and the reliance on off-farm grazing.
The big call is stock numbers where a one off cull of 10-20% of cows post calving might be a good option. Critically this has a one off cash flow benefit, and tightens the operating budget without impacting capacity in 24 months.
Roger Wilson says, “Expect this to contribute to a reduction in milk supply for 2015/16 which is forecast to provide Fonterra with a bit more flexibility at its end.”
The reduction in supply should contribute to improved operating performance for dairy companies in 2014/15. Fonterra is already running at full capacity which limits its product optimisation options. With increased capacity and reduced supply Fonterra will have the flexibility to move a much higher proportion of product into high value streams and drive a much better EBIT number.
It shouldn’t be forgotten that returns across the balance of the industry are still in a good place, 60% plus of the primary sector is growing, this shouldn’t be overlooked.
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