Lyndon and Elizabeth Grant’s debut season as contract sharemilkers could not be tougher.
The Ashburton farmers bought their 710 cows at $2300 a head and now have a herd priced at $1.63 million producing milk on a slumping payout forecast.
In sharemilking, herd owners like the Grants take on farm management costs and work on behalf of a farm owner in return for an agreed share of milk payment.
Most Fonterra suppliers would have guessed before last week their co-operative was bracing for a shock but a drop to $5.30 a kilogram of milksolids from more than $8 last season was still hard to take, Lyndon Grant said.
The couple had budgeted for a return of $5.80 to $6.
Then came another shock: a Fonterra production auction in which prices dropped by more than 7 per cent and a New Zealand dollar that refused to fall in sympathy.
The outlook for dairy farmers could get worse before it gets better and some could be in trouble if their management costs are $4.50 a kilogram of milksolids or more.
Grant will be ditching thoughts of new utes, tractors, or cars, while farm repairs will be delayed and holiday plans will be out the door for 12 months or so.
For the past four years the Grants have been lower-order sharemilkers, which amounts to a variation of the payment and job conditions in a 50/50 contract.
Like many in dairying, they admit to having had a reasonably good ride in that time.
Grant said they were optimistic about milk prices rising again.
«If that means missing out on a holiday, I think that’s a sacrifice people will be prepared to make.»
Christchurch accountant David Seath said cashflow would be farmers’ top priority.
Seath, a director at Brown Glassford and Co, said some of the company’s clients had operating costs as low as $3.65 a kilogram of milksolids but others were running at $4.80.
«At $4.80 they will be a little bit more uncomfortable if they can’t pull back their costs.» Seath had not sensed panic at the latest forecasts, although farmers would already be factoring the implications for this season and next.
Fonterra, Westland Milk Products and Synlait had signalled a drop well before this week but it was more than some expected, he said.
It would be a case now of re-casting the 2013-14 cash forecast to see what it looked like, adjusting tax forecasts and making changes to farm management.
«In a sense, it’s looking beyond 12 months.»
An additional factor in any restructuring for farmers is the multi-million dollar value of their cows.
Each year, farmers are forced to make a call on how many cows to buy, sell or send to slaughter if they are at the end of their productive life.
Hazlett Rural dairy manager Jim Hazlett said cow prices in herd sales earlier this year had averaged about $2000 a head – down from a peak of $2200.
Those who really wanted to go dairying would pay the going rate for cows when herd sales began next autumn but Hazlett sensed last week’s Fonterra and Synlait forecasts had suppressed interest in conversions. «What’s happening now, it’s just going to be a stand-off,» he said.
Cow values did not always track milk prices, he said.
«Supply and demand is probably a bigger factor than payout. If a man’s committed to a conversion then he’ll need to buy cows. He will look to purchase and the supply will follow.»
Source: Stuff
