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Dairy Wounded in NZ After Record Pay Cut

11 March 2009

NEW ZEALAND - Dairy farmers in New Zealand are reeling from the shock of the biggest pay cut they have seen.

According to DairyNZ figures, the average farmer's income after all expenses, mortgage repayments and tax will go from $115,000 to just $17,000 inside a year.

Farmers are reacting in different ways. Plans made at the beginning of the dairy year last July when the payout forecast was about $7 have been scrapped now that it is $5.10.

Feed costs have been slashed and fertiliser use cut. Some farmers who thought their days of 5am starts were behind them are not renewing sharemilkers' contracts and are going back into the milking shed.

Making matters worse is Fonterra's decision to delay the advance payment on this year's payout. Federated Farmers dairy chairman Lachlan McKenzie says this has left dairy farmers having to find up to $1 billion to keep their farms running, all of which will be added to their overdrafts.

He is scathing of banks that have not dropped their overdraft rates to match the fall in the official cash rate, although banks respond that their funding comes from a variety of sources that have been 1.5 per cent above the cash rate.

The gross figures still sound good. At a Fonterra payout of $5.10 a kilogram of milksolids, the average dairy farm's gross income will be $510,000, down from last year's $790,000.

But that does not include farm working expenses, which DairyNZ says will take $4.03 of the payout. Mortgage and overdraft payments will take another $1.15.

DairyNZ estimates the farm will make 28 cents from livestock sales and this leaves a taxable income of 20c, which, for the average farm producing 100,000kg of milksolids, is $20,000.

The tax on that is about $3000. "I can't deny it, some farmers are hurting," Mr McKenzie says.

Doing the Sums:

What it means when Fonterra's dairy payout drops to $5.10 a kg of milksolids: Average dairy farm's gross income: $510,000 (Last year $790,000). Farm working expenses: equal to $4.03 of payout. Mortgage and overdraft payments: $1.15 of payout. Estimated livestock sales returns: 28c. Taxable income of 20c a kg, equal to $20,000 for average farm. Less tax: $3000. Average after-tax income: $17,000.

TheCattleSite News Desk



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