Marginal return the key

10-08-2009 | Not Specified

The average cost of milk production, operating expenses per kilogram of milksolids, is the best indicator of operating profit a hectare.

The recently released DairyNZ 2007-08 Economic Survey shows that this is true even in a year with high payouts and many regions adversely affected by drought.

DairyNZ Economist Matthew Newman says this means it is the marginal return decisions that are more important in determining profit rather than the volume of milksolids produced or the total cost in isolation.

World milk prices have dropped dramatically since the highs of early 2008, costs are still at a high level, some farms are still in need of pasture renewal following the summer 2008 drought, and it has been a very cold and wet winter resulting in much lower pasture covers than normal. On top of this debt levels have increased and land prices are dropping.

Newman says about a quarter of dairy farmers will face liquidity risk this season.

Farm working expenses (FWE) are forecast to drop back to around $3.30 in 2009-10, which would still be $0.60 higher than 2006-07. Supplementary feed and grazing costs are forecast to be 25% of total FWE with wages (16%) and fertiliser (14%) the next biggest expenditure items.

"Of course each farm is unique and has different challenges, but there is no doubt that 2009-10 will be difficult for most."

He says times are tough and expected to remain this way for the next two seasons, but the medium-term outlook is positive. World populations are growing and as incomes rise following the global recession, demand for protein will increase. Dairy farmers will have to ride out the storm by producing milk more efficiently.

Dairy farmers are traditionally resilient and respond quickly to market signals, but there is nothing like a downturn to remind them of the basics.

The 2007-08 survey can be downloaded from the DairyNZ website www.dairynz.co.nz or ordered by calling 0800 4 DAIRYNZ.

  Printable View