The extremely strong dairy season is likely to drive on-farm profitability to a record high this year, analysts with financial services company Forsyth Barr believe.
In an extensive 'Milk Memo' looking at the current situation in dairy, Forsyth Barr senior analyst Matt Montgomerie and associate analyst Benjamin Crozier estimate a farmer breakeven milk price (BEMP) of about $8.30 per kilogram of milk solids for the 2024/25 season.
Fonterra is indicating a likely farmgate milk price of $10kgMs, while this week it updated its earnings guidance for the financial year to a range of 55c-75c per share. Fonterra's policy is to pay out 60% to 80% of profits as dividends.
The analysts therefore take this as an implied dividend of 45c-50c.
It would give a spread between milk price and dividend returns, and BEMP of over $2kgMS.
The analysts say the spread "will be the widest spread on record".
"Looking beyond 2024/25, we expect a slight reduction in BEMP. We estimate a NZ$9.50 milk price in 2025/26 would create a ~NZ$1.70kgMS positive spread to the BEMP (including Fonterra dividends)," they say.
"This excludes the potential impact of Fonterra's possible special dividend (NZ$1.50–NZ$2.00), [from the proposed sale of its consumer brands businesses] which we would expect farmers to primarily use for debt repayment. We acknowledge that different production systems and ownership models make profitability comparisons across farms and regions challenging—there is no one-size-fits-all approach."
The analysts note that "life is good for NZ dairy farmers currently" and they also note that season-to-date production is also the highest since 2020, "pushing NZ dairy sector revenue to its highest ever".
"But it's not all positive—China, NZ's key export market, remains under pressure, with sluggish dairy imports. Weak local prices have slowed China’s production, offering some short-term relief, but NZ needs to remain open to diversifying its dairy exports."
Montgomerie and Crozer say dairy has historically directly contributed around 4% of NZ's GDP and accounts for 25%–30% of total exports, "making it the country’s largest export sector by some margin".
They say the implications of improving on-farm returns are significant for the broader NZ economy, particularly given ongoing economic weakness.
"A NZ$1 change in the FGMP [farmgate milk price] equates to a ~NZ$2bn production revenue impact (production multiplied by FGMP), so there is a clear, substantial multiplier effect.
"Further, the combination of dairy farming and dairy product manufacturing contributes >50,000 jobs across New Zealand (~2% of total employment). Historically, primary industries as a whole have contributed 10%–15% of NZ's GDP."
7 Comments
Great news.
Not so sure about that. The primary export market is full steam into a deflationary environment.
I always take issue with the use of dairy GDP as a useful metric. It measures on-farm wages and profits. Nothing else. It does not include any contribution from farm-goods supply companies such as fertiliser, chemicals, vets, rural professionals, transport companies, silage companies and so on. Nor does it include the processing and marketing side of the industry. All of these inputs are assumed as a cost without value-add.
KeithW
Yes - for sure. When dairy does well so much more in NZ does well too.
When I started my professional career we worked on cash farm inputs including labour comprising about 50% of gross farm income. In that environment, and the reliance on the British market as the key destination for product, there was considerable income stability from year to year. Those days have long gone.
The implication of this is that this year's excellent prices do not provide a basis for forward budgeting and planning. Most dairy farmers will indeed attempt, this year, to reduce their debts. Debts are still too high.
KeithW
Agree on debt Keith - same applies to any primary industry in NZ - you cant really budget forward to much as there is so much variability/risk that we cant control in any way. In a very volatile market environment you need to have the other factors you can control low risk to help counter some of that.
2 things.....
First, break even milk price - BEMP. At $8.30, that reflects the significantly higher inflation of farm inputs that the national economy inflation level. BEMP has risen from around $6.50 a couple of years ago, nigh on 30% increase. Historically there have been regular cycles of high and low commodity values for dairy products. It won't take much of a swing lower to put farms into knife edge profitability.
Second, GDP. I totally agree with Keith's comments and go further. That is totally misrepresenting agricultural contribution to the economy when a single sector like dairy contributes more than 30% of ... Read more
2 things.....
First, break even milk price - BEMP. At $8.30, that reflects the significantly higher inflation of farm inputs that the national economy inflation level. BEMP has risen from around $6.50 a couple of years ago, nigh on 30% increase. Historically there have been regular cycles of high and low commodity values for dairy products. It won't take much of a swing lower to put farms into knife edge profitability.
Second, GDP. I totally agree with Keith's comments and go further. That is totally misrepresenting agricultural contribution to the economy when a single sector like dairy contributes more than 30% of total export earnings is only credited with a ~5% contribution to GDP. From my brief research, in 2024, agricultural exports accounted for $40.3b and tourism $16.9b, yet on GDP basis, agriculture is 5% and tourism 4.1%.
Read less
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