June 19, 2008

$71,000 From Record Season


Dairy farmers will end up with average profits of $71,000 from a record-breaking season by the time all costs are cleared, says a DairyNZ economist.

The after-tax result is less than expected for a dairy boom driven by rising milk commodity prices.

DairyNZ development and economics manager David McCall said rising costs had eroded the bottom line for farmers for the season ending July 31.

"There is no doubt that farmers are doing better than they have the last few years, but costs have gone up a lot from last year as suppliers have taken increased margins and, like all New Zealanders, interest rates and fuel have gone up for them.

"This year is a satisfactory year for their financial (accounts), but there is an element of catch-up on previous years."

McCall said the real progress would be made next season if the payout stayed up.

The result is based on a survey commissioned by the dairy- industry research organisation which shows an average 110ha-New Zealand farm, worth $4.8 million, will produce 100,000kg of milksolids this season for a $760,000 payment from a Fonterra $7.60/ kg payout. Another 30c/kg is being held by the giant co- operative, which will decide in September how much of this will go to farmers next season on top of a forecasted $7kg payout.

Average operating costs absorb $4.91 of the $7.60 payout, including freight, electricity, wages, vehicles and fuel, weeds and pests, supplementary feed and grazing, repairs and maintenance, administration, rates and accounting and animal health and breeding.

Last year the break-even point was at $3.72.

Of the remaining $2.69 from this season's payout about $1.60 ($150,000 in interest and $10,000 in rent) will be allocated for interest and rent repayments by the average farmer.

Dairy farmers carry an average $1.8m debt on their operations, with interest repayments set at about 8.5 per cent.

This leaves $1.09 ($109,000), and when tax is removed farmers will keep 71c ($71,000) from every kilogram of milksolids produced.

McCall said most farmers would be looking to spend their after- tax result on paying principal on their loans, developing their farm or buying other goods.

Some farmers would be looking to expand their business or forward buying fertiliser because it was becoming more expensive.

The $71,000 result represents a 1.5% after-tax return on their $4.8m farm.

Some top farmers will be about $40,000 better off and some bottom farmers will earn $40,000 less, and this gap could be wider in extreme cases. Canterbury farmers, with their larger herds and milk production, can be expected to be above the national average.

McCall said farmers had also benefited from capital gains in their farm values.

"That is always what farming is about, and they are asset rich and cash poor, but this year there is a bit more cash."

Last year more than three- quarters of the nation's dairy farmers were running negative cash balances, according to Ministry of Agriculture figures.

Dairy NZ says average milksolid production for farms around the country is about 104,000kg, but the North Island drought set this back by 3% this season.


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