Farmers face negative cashflows despite advance rate hike

Federated Farmers dairy chair Richard McIntyre says rising farm input costs has taken the break-even price for many to $9 and he expects many farmers to be facing negative cashflow situations.

"With continued on farm inflation and an average break-even milk price of around $9, Fonterra's 2023-24 opening was not what farmers wanted to hear, but better than some were expecting," he told Dairy News.

"This means that many farmers will be in negative cashflow situations and will need to work with their advisors and banks to find ways to make ends meet.

"This could include reducing excess costs, creating efficiencies, deferring capital expenditure and reducing loan principal payments."

Farmers will also be nervously watching inflation figures and Reserve Bank commentary to see if they've seen the end of the interest rate hikes and get an indication of when they might start to come down.

McIntyre notes that Fonterra has recognised that cashflow is the most immediate concern of farmers and have altered their advance payment guidelines to allow farmers to be paid more of their milk payment earlier.

"This does however come with a burden that Fonterra will have to react and communicate with farmers early should the forecast milk price trend downwards," he says.

For milk supplied between June and December, the advance rate is $6/kgMS based on a forecast price mid-point of $8/kgMS. Last season, Fonterra paid an advance rate of $5.70 with a forecast midpoint of $8.20/kgMS. Fonterra's opening forecast farmgate milk price for this season is $7.25 to $8.75/kgMS.

Chief executive Miles Hurrell says this reflects an expectation that China's demand for whole milk powder will lift over the medium-term.

"We expect demand to gradually strengthen over the course of FY24 as China's economy continues to recover from Covid-19.

"However, the timing and extent of this remains uncertain, with China's in-market whole milk powder stocks estimated to be above normal levels following increased domestic production. This is reflected in our wide opening forecast range for the season.

"We recognise the pressure farmers are under and have designed a new advance rate guideline to get cash to farmers earlier in the season.

"Our strong balance sheet allows us to make these changes and we will be using this new advance rate guideline going forward, starting with the season about to commence," says Hurrell.

Fonterra Co-operative Council chair John Stevenson says the revised advance rate schedule will be appreciated by farmers.

"It shows that board and management have heard council and farmer feedback that the co-op needs to get more cash to farmers earlier. With receiving more of the milk price sooner, farmers will need to be mindful of the possible impacts on milk payments and cash flows later in the season in the event of downward revisions to the forecast milk price."

Stevenson adds that in the current environment of high interest rates and inflationary costs, the $8/kgMS midpoint of the 2023/24 opening forecast will mean farmers will be carefully looking at their budgets heading into the new season.

"This forecast reflects an expectation that demand from China for whole milk powder will lift over the medium term."