Tuesday, August 11, 2015

Frank Newman: Dairy by the numbers

The latest fall in dairy prices has raised the level of concern about the sector and more generally about the economy.  The easiest way to cut through the media sensation is to let the numbers do the talking. 

Here they are for the dairy industry.
  • 11,500 farmers supply Fonterra.
  • $3.85 per kg of milksolids, Fonterra's revised farmgate milk price forecast.
  • $8.40 was the payout in the 2013/14 season (the peak).
  • $5.40 is the milk price the average farmer needs to break even (including debt repayment costs).
  • $US1590, the price of international whole milk powder at the last dairy auction, down 10.3% on the last trade and down 51.4% since March.
  • 1.6 million hectares, the total land area in dairy farms, or 6.3% of NZ's land area. 
  • 4.9 million, the number of dairy cows in New Zealand. That's 3 cows per hectare.
  • 4.5 million, the population of NZ in 2014.
  • 26.8 million hectares, the total land area of NZ. That's 6 hectares per person.
  • 144 hectares, the average farm size.
  • 1028 kg, the average milk solids yield per hectare, or about $4,000 of revenue based on the projected payout.
  • $5,073 the farm working costs per hectare (in the 2012/13 season).
  • 20.7 billion litres of milk was produced in the 2014 season, containing 1.8 billion kg of milksolids.
  • 11.5 litres of milk produces 1kg of milk solids. About 10% of milk is solids, the rest fluid.
  • 33 cents, the price farmers will receive per litre of milk based on the new payout.
  • $2.75, the price of a 1 litre bottle of Anchor milk in the supermarket.
  • 413 cows, the average herd size.
  • 4196 litres of milk, or 365kg of milksolids, the average annual production of a dairy cow.
  • $1,400 next year's projected income per cow.
  • $1,500 to $1,800, the approximate cost to buy a milking cow.
  • $580,000 the forecast annual gross revenue for the average dairy farmer before expenses.
  • $144,000 the projected average annual loss per farm, before debt servicing costs.
  • 90% of farmers will need to take on extra debt to keep going.
  • $30 of debt per kg of milk solids is said to be a high debt level for a dairy farmer.
  • 50 cents per kg is the amount Fonterra is lending as a support package to fully "shared up" suppliers. The co-op has slashed its capital expenditure by $500m-$600m to fund the support measures.
  • 0% is the interest rate of the support loan for 2 years, to be repaid when the milk price recovers above $6 kg.
  • 34% of NZ's dairy herds are in the Waikato.
  • 9% of NZ's dairy herds are in Northland (1,088 herds). The average farm size is 133ha stocking 2.4 cows per hectare, producing 102 million kg of milksolids.
  • 35% of NZ's dairy farmers are share milkers.
  • 20%, dairy exports of NZ's total exports.
  • $2 billion less income for dairy farmers for every $1 fall in the payout.
The figures show how tough it will be for dairy farmers over the next year or two. These of course are averages, half will be better off that the figures reveal, and half worse off.

The most telling figures are the projected gross income of about $4,000 a hectare and farm operating costs of about $5,000 a hectare. The average 144 hectare farm will therefore have an operating loss of $144,000 before debt servicing.

According to Fonterra's boss, the revised payout is "below the bottom", which is actually nonsensical. The bottom is only ever known in hindsight, and the current price may not be that point.

What he was probably saying was at the current commodity prices the production of dairy products is unsustainable in the long-term; supply must inevitably fall as those least able to ride out the downturn leave the industry, causing the market price to rise (assuming demand does not decline).

Those who have lived through a number of investment cycles tend to come out wiser recognising that the prosperous times are for debt repayment and the lean times for increasing efficiency and focusing on doing the job well, at the least possible cost - including disposal of spare assets or land to reduce debt.

That discipline will apply not only to farmers but the many people who depend on the farming sector, including central government who will no longer be able to budget on receiving tax revenue from the sector for quite a few years as losses are carried forward into the future.


Anonymous said...
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It must be time we went back in time where we went to the farmers gate and bought our milk


Geoff said...
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Economics 101 ?

1 Dairy farmers making normal profits
2. Demand increases, greater than supply
3. Dairy farmers receiving super-profits.
4. Number of dairy farmers increases markedly as more jump on the band-wagon to receive those super-profits - NZ and world-wide.
5. Supply begins to exceed demand
6. Super-profits disappear
7. Dairy farmers now receiving LESS than normal profits.

And Yes, there were also external forces at work, China stockpiling, Russia no longer importing, et cetera.

8. Inefficient dairy farmers go to the wall, taking with them supporting industries.
9. Efficient dairy farmers consolidate
10. Production lessens, demand drops below supply.
11. Dairy farmers (those who survived) receive normal profits.

Why is everyone so surprised?

Anonymous said...
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The farmgate milk from A2 cows tastes better also causes less allergies.Try it. We go to a great farm with vending machines just out of feilding

Pete Thecurious said...
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Thanks, for the dairying reality numbers.
A heads up for some cyclical belt tightening.
33cents for farmer - $2.75 cost to customer. A bit of a gap.Hmm

D'argent said...
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I think that the numbers that will better project the state of the dairy industry would be the amounts of debt that is being serviced by the sector.
We have seen figures bandied about like Fontera owing $7,000 million which is between 40% and 60% of their total assets (depending on calculation methods). If so what would be the average % interest they would be paying. At this level of debt - how much tax would they be paying (or are they as exempt as a church being a co-op) If they are loaning $0.5 per kilo to in need farmers; does Fontera need to borrow that money and if so what interest is that silently accruing.
And similar numbers regards the debt load (and tax payable) for the average farm, and esp those converting in recent years. Down the SI way it is said a farm conversion involves about $5 million per farm, a $1m for the land, another $1m for the stock, another $1m for the shed, another $1m for irrigation, another $1m for houses, tracks, fences and feed in and out gear.
The amount of money being borrowed might paint a bigger picture than the amount of money being earned.

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