Brokerage group OM Financial Limited (OMF) says the average New Zealand dairy farmer is likely to lose $140,760 this season.
Its not welcome news for new and used tractor and machinery retailers.
According to BusinessDesk, a dairy report from OMF suggests there is a further risk that Fonterra could lower payouts again, pointing to a potential milk price of $3.89 per kilogram of milk solids. Fonterra reduced prices on January 28 to $4.15/kgMS.
OMF estimates the current cost of production is $5.31/kgMS.
OMF says dairy farmers are likely to face the third season of weak prices, with many becoming reliant on credit lines and vulnerable to a shift in banks’ willingness to extend loans in the hope of repayment.
BusinessDesk reports OMF suggests that presently banks are showing a willingness to extend credit lines to struggling dairy farmers on the assumption that the outlook will improve, but that lender may soon begin to manage exposed debtors out of their holdings.
BusinessDesk says it reported last month that banks said more of the most heavily indebted dairy farmers will be asked to sell up as non-performing loans increase with the lower forecast payout.
Bankers spoken to by BusinessDesk and rural advisors say the most marginal farmers were having their debt capped with no further working capital supplied while others are being urged to sell up.
In June, the Reserve Bank put the level of debt in the dairy sector at $37.9 billion.
OMF says that may be an under-estimate because the central bank’s figures use data sourced from owner-operator farms and doesn’t include the debt of Fonterra, supply chain businesses and sheep and beef farmers reliant on dairy for marginal income.
OMF says subdued demand from China and the trade embargo on Russia are likely to remain the key features obstructing the rebalance of supply and demand in global markets.
EU production was 3.1% higher on a year ago, and OMF cited Dairy Australia as saying “a supply response (from the EU) remains elusive.”
