Milk payout drops 10%

November 21, 2008

Well, the rumours were correct - Fonterra announced a substantial drop in forecasted milk payout for the 2008-2009 season.

The new estimate is for $6.00 per kgMS, being $5.60 for milk + $0.40 for the value added component. This represents a drop of $0.60 per kg/MS from the previous estimate, which was already reduced down from the initial estimate of $7.00 per kg/MS.

A 10% drop in income probably converts into a 20% to 50% drop in profits for the typical farmer so this reduced payout forecast is going to hit the industry hard.

Sure, $6/kgMS is better than what was achieved in other years, but farm expenses have been steadily rising and many farmers have budgeted on higher payouts given Fonterra's extremely optimistic statements earlier in the year.

Farm and livestock prices have already dropped off from their record high values and are sure to be headed further south now - so those farmers who sold up last year will be sitting happy while those who invested heavily earlier in the year and those new to the game are likely to be in some financial stress right now.

But that's the name of the game. If there's anything positive to be taken from the lowered payout forecast it's that farms and cows will become a little more affordable for those farmers looking to expand their business in search of longer term gains.

For us, being new to farming, things don't look all that rosy right now.

farm business | price of milk

Comments

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Rachel said on 11-Feb-2010,

"A 10% drop in income probably converts into a 20% to 50% drop in profits for the typical farmer..." - that seems like a geometric drop in profits! Have they checked the efficiency of their farming methods?

aYearOnTheFarm said on 11-Feb-2010,

Rachel, there are high fixed costs such as interest, fertiliser and labour.

Farmers will budget on an expect payout level and also figure in what the minimum payout they can survive on is.

When the payout drops then farmers are in for a big financial squeeze. The stronger ones (i.e. have been around for longer and are less leveraged) will be able to survive a couple of bad years but the weaker ones could be forced to sell up.

When the payout rises then the opposite happens - farmers' profits can increase substantially.