Rising costs take the gloss off

Strong demand and tight global supply, including soft domestic milk production figures, are putting upward pressure on prices.

However, costs – both on and off farm – are rising, threatening profit margins.

BNZ senior economist Doug Steel says price rises on Global Dairy Trade auctions over the last few months mean a record milk price, beating the 2013-14 record of $8.40/kgMS, is highly likely. But he points out that this doesn’t mean “a record price in real terms”.

Rising costs mean it won’t be a record profit for most farmers. However, strong revenues from the high milk price will mean a reasonably profitable season.

“Even if GDT prices are maintained at current levels going forward, there’s a reasonable chance of a $9 milk price this season,” he told Rural News.

But Steel warns that we’re living in a world “with many moving parts”. International fertiliser prices and shipping costs continue to rise. On farm fuel and contractor costs are soaring, while interest rates also on the up.

“Farmers are doing their best to manage costs, but while revenues are strong, the high costs take the gloss off the bottom line to some extent,” says Steel.

BNZ is forecasting a milk price of $8.90/kgMS – the top end of Fonterra’s forecast milk price range of $7.90 to $8.90/kgMS. The co-operative is expected to upgrade its forecast when it releases its first quarter results on December 3.

Steel says there’s a strong chance Fonterra will revise its forecast price range. He notes that since the co-operative’s last upgrade, international dairy prices have risen 7%.