As New Zealand’s biggest export earner, the dairy sector is integral to our economy. While recent years have seen the industry struggle with trade barriers, environmental and regulatory issues, and soft prices, there are now signs the dairy sector is on its way to recovery. So what can farmers do to take advantage of the changing conditions and thrive into 2025?
Recovering dairy commodities signal positivity
Fonterra’s September update brought positive news for farmers, announcing a lift in its 2024/2025 forecast Farmgate Milk Price midpoint. Demand from China has improved and dairy commodities are recovering after the downturn during the 2023/2024 season. Fonterra’s forecast Farmgate Milk Price range for this season is $8.25-9.75 per kgMS, a significant improvement on the opening forecast for the season of $7.25-$8.25.
DairyNZ’s current forecast average breakeven milk price is around $8.15 per kgMS, making Fonterra’s current $9 midpoint price palatable for many dairy farmers. And while some parts of the country have suffered from poor weather which hampered production targets, the majority of New Zealand had a good winter and a positive start to the season in terms of dairy production.
With the expected reduction in interest rates over the coming months, most dairy businesses will be making their way back to profit. However, many will still be recovering from the tough conditions over the last year, meaning cash flow may remain tight for the next 12 months.
Processors battle for supply
Farmers will be watching with interest as milk processor dynamics continue to play out and the major players vie for supply. Fonterra's strong balance sheet and short-term strategy appears to be landing well with farmers, especially as some of their competitors face major headwinds. Synlait’s challenges are well-documented, and Fonterra appears likely to be the main benefactor with a substantial volume of supply expected to flow back to the Co-op. While Fonterra has said there will be no special terms for farmers switching their supply from Synlait, the company has made great efforts to reduce barriers to entry, including introducing a new flexible shareholding capital structure.
Navigating cash flow and capital concerns
On-farm profitability has been hit by economic and financial pressures in recent years, but to ease pressure, Fonterra has adjusted its advance payment schedule, bringing payment for milk supplied forward. While this has allowed farmers to be paid more for their milk earlier in the season, it has meant less cash coming through via deferred payments in winter and spring, causing cash flow issues for some. The updated advance rates published for the 2024/25 season will see a typical spring calving operation receive little to no income in July 2025 - something to keep in mind heading into the winter this coming year.
In light of these cashflow pressures, banks have been requesting detailed cash flow forecasts to understand farms’ revised working capital requirements and overall cash flow. Gaining access to capital remains a challenge for the wider food and fibre sectors, so it’s essential for farmers to focus on their financial position and how they present themselves to banks.
Getting ahead of regulatory changes
There remains a significant level of uncertainty around regulation in agriculture, particularly in relation to on-farm emissions and freshwater management. Fonterra has committed to reducing its emissions by 2030 and has reinforced its focus on sustainability. It’s important for farming businesses to understand their position in relation to these sustainability measures, and how they may be able to influence their footprint. Understanding their position will ensure they’ll be in a better position to act when there is more certainty around regulations.
Maximising opportunities with technology
Recent advancements in farm technology, such as wearable devices, have been significant. Although the dairy industry still faces labour shortages, these innovations can ease some of this strain and improve efficiency in some situations. Financial tools like Figured and Farm Focus also assist farmers with business planning and forecasting.
More positivity ahead
At a midpoint of $8.90-9.00/KgMS, the current milk price is a positive sign of things to come. If this trend continues, the return on investment in farming, relative to the cost of capital, will become more favourable and should see investment flowing back into the sector.
Steps to success
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Get your team around the table regularly. With so many variables in the average dairy business, it’s important to have a team around you to bounce ideas off and help tackle challenges and opportunities. This includes liaising with your trusted advisers and bankers.
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Understand your current ESG position and what you might need to do to adhere to new regulations. Doing so will not only make it easier to comply when the time comes but can also uncover opportunities to improve efficiencies on-farm, leading to profitability as well as sustainability.
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Work with your team to prepare a detailed cash flow forecast each year to help front-foot your banking conversations. A detailed forecast is one of the most powerful tools a farmer can have and can make a big difference when it comes to your relationship with your bank.
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Conduct scenario planning to understand what your numbers might look like in a variety of different situations, factoring in weather conditions and economic impacts.
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Have a strategic plan. Developing a plan and having proactive and clear communication around it can transform your business. A strategic plan can also help to progress family discussions regarding succession and can make for a positive transition for everyone. Your trusted adviser can help you with this.
As the dairy industry continues to evolve, it’s important for farmers to stay on top of not only their finances and forecasts, but also updates from the wider industry. Our specialist BDO Agribusiness team can help dairy businesses like yours interpret industry reports, your financial performance, benchmarking, and more.
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