MANY southern export-orientated dairy farmers will be milking for prices below the cost of production for the next year.
While financial challenges of that degree are not unheard of in the dairy industry, the longer-term concern of industry leaders is the erosion of production capacity and working capital that will likely result from the downturn.
Dairy industry figures put the average cost of milk production for Victorian, South Australian and southern NSW farmers at $5 per kilogram of milk solids, according to Australian Dairy Farmers acting president David Basham.
Opening milk prices in the region range from $4.31 to $5, with the reality for some farmers, particularly those with seasonal calving, that income will be as low as $3.90kg/ms.
“Some producers will be able to make short-term cuts to create a breakeven budget but that will likely lead to losses in the future,” Mr Basham said.
Agribusiness banking specialist Rabobank believes many milk producers have the equity levels to place them in good stead to weather the current storm.
It’s latest industry report, Oceania Dairy - Let’s Debt Serious, says much of the industry is in a position to source working capital, with Australian farmers having learning from previous cycles the importance of generating cash buffers and appropriate gearing levels to manage volatility.
“Over recent years, many dairy producers have taken the opportunity of improved farm profitability to pay down debt rather than expand,” said report co-author Michael Harvey.
However, he agrees the likelihood of eroded equity will mean producers will need to use the next upward price cycle to strengthen business structures.
“The rules of engagement have changed for Australian dairy and it is no longer enough to be a low-cost, pasture-based producer,” he said.
“Instead, there needs to be appropriate flexibility in the production system so costs can be scaled back when times get tough.”
Mr Basham said a number of farmers were already considering exiting, both younger producers under heavy financial stress and those near retirement.
While that was sad to see, the good thing was those decisions were being made early, he said.
The fact the export heifer market has gone off the boil with far less demand from China is adding to the strain.
High cattle prices would provide little relief given cattle sales generally only account for ten per cent of a dairy farm’s income, Mr Basham said.
Dairy industry analyst Joanne Bills, a director with Freshagenda based in Victoria, said just how substantial industry exits would be depended on debt exposure and off-farm incomes.
“Farmers are currently assessing whether they can weather a year like this, taking into account better seasonal conditions and the prospects of a price recovery into next year,” she said.
“Southern farmers are bearing the brunt of the global price drop and that follows on from two tough seasons so many are at the end of their gearing opportunities.”
The issue with milk producers servicing the current strong meat market was that cows that might have been carried through would now be culled, she said.
“That means fewer replacements coming through and that farmers are possibly cutting into future productive capacity,” Ms Bills said.
“It’s a tough decision - farmers will have to weigh up short-term cash flow benefits against longer-term prospects and ensuring they are in the best position to capitalise when the milk market does turn, as it inevitably does.”
Mr Basham, who milks 350 mainly Holsteins at “Goonamurra”, near Adelaide, said diversification would be an option for some.
“In Tasmania, for example, a lot of milk producers already operate in several different commodities and can shift resources,” he said.
“However, a lot of investment goes into infrastructure for dairying and any shift can leave overheads exposed so it is generally a very long-term move.”
Are there any bright spots on the horizon?
“The medium to long-term outlook for dairying is relatively optimistic, as world demand for protein continues to grow,” Mr Basham said.
“Russia could return as a buyer any day and that would turn things quickly.
“Also, seasonal conditions in the south are improving.”
Industry group Dairy Connect said as farmers battled to come to terms with less than breakeven pricing, the huge variation across the board was adding to the hurt.
Opening prices received from the same processor may vary by almost $1kg/ms, according to Dairy Connect, and that highlights the issue of commercially unfair supply contracts.
Chief executive officer Shaughn Morgan said an analysis prepared for south west Victoria’s Moyne Shire concluded the milk price crisis would cost that regional economy more than $67 million.
That was based on a milk price cut of 15 per cent resulting in a $170,000 to $200,000 annual loss per farm in the area.
