Rising expenses devour almost half of Fonterra's record dairy payout

The last dairy boom saw a rapid increase in the costs of production in dairying and it appears this is an issue again.While all of NZ will be very grateful that the record payout and increasing production of the dairy sector is playing a large part in insulating our little country from the worlds financial troubles, all farmers will realise that agricultural commodities are cyclical, and at some stage the worm will turn.

Reducing the exposure to debt is a no brainer for any high leveraged property and insulating enterprises to a future downturn will be a wise investment decision. Dairy farmers face a reduced payout next year, dairy commodities which are easing and international demand for products (other than Asia)  is weak.

Grain prices are at yearly highs and volumes grown in NZ are dropping, some of it due ironically to dairy conversions of cropping farms. New Zealands competitive advantage is our ability to grow cheap high quality grass grown with reasonably reliable rainfall or irrigation, and that should not be forgotten when heavily supplemented options to increase production are looked at. Dairy farmers in the US that use a grain dominant feed diet, have struggled for profitability even under better prices.

Some talk is now emerging that banks are relaxing tough lending criteria amid heavy repayment of debt but new conversions will have to do their sums very diligently as they enter a market at a high and costs to convert and produce ever increasing.

Rising on-farm expenses will wipe some of the gloss off the record 2010-2011 dairy payout and new season forecast reports The Waikato Times. Specialist dairying accountant Pita Alexander said the "unrelenting" climb in feed, fertiliser, wages, power and fuel costs had taken expenses on many farms to $3.85/kg of milksolids. The 2010-2011 season payout was $7.90 and the $3.85 did not include interest, land rent or personal drawings, said the Canterbury-based principal of Alexanders Ltd. "There is no real answer – you can be as ruthless as you like, as efficient as you like, but these costs are from outside the farm gate."

Agriculture Ministry North Island regions manager Phil Journeaux said Statistics NZ figures supported the complaint. In the 16 years from 1994 to 2010, the Consumer Price Index rose 45 per cent but the Primary Producers Index climbed 99 per cent. "The leading cause is the non-tradeable sector of the domestic economy, central and local government charges and rates and our major duopolies such as Telecom and energy companies."

Meanwhile, Morrinsville specialist dairy farm accountant Nigel McWilliam said farmers had just received the last 20 per cent payment for milk supplied in 2010-2011, and a record $4.40/kg advance on the new season's forecast payout. Farmers were focusing on debt reduction and planning how to provide a buffer against tougher times, he said. Dairying is carrying $31 billion of debt, two-thirds of the total national agricultural debt. "They are taking full advantage of a potentially good production season this year and setting up their systems to bolster against drought.

"They won't get anything further until February," McWilliam said. "They're looking at consolidating their business, focusing on debt and investing in their systems to make the business robust. They are focusing on things that make money – feed systems in the shed, good stock, and just really good management systems, investing in labour and replacing equipment. But they are not buying new equipment for the sake of it."

Journeaux said the only way farmers could combat the "relentless treadmill" of working expenses was to improve productivity. This involved keeping an eye on research and development, technology transfer and taking "good ideas from science and other farmers". When it came to spending "it comes back to value for money – which is not the same as cheap", he said.