Hopes dairy boom will buffer farmers' 'tight' profits due to war in Middle East

6:21 pm today

Calves at a dairy farm in Darfield in early spring.

Photo: RNZ/Monique Steele

An agricultural economist believes several strong dairy seasons should buffer most farmers from the stubbornly high costs of farm inputs, resulting from ongoing war in the Persian Gulf.

A chokehold on key Middle East exports through the closed Strait of Hormuz, particularly energy and fertiliser, resulted in high prices for New Zealand's export-reliant farmers.

Now four months into the Strait's closure, economists were forecasting the costs of the closure and its impact on dairy farmers' bottom lines.

Industry group DairyNZ revised its earlier economic outlooks for farm profitability this new dairy season 2026/27, that started in June, to encapsulate elevated farm input costs.

Last week, Fonterra announced its opening farmgate milk price for this new 26/27 season, at a $9.75 per kilogram of milk solids (kg/MS) midpoint within a range of $8-11kg/MS.

In its latest EconTracker to map the breakeven farmgate milk price, DairyNZ modelled three scenarios for the opening of the Strait of Hormuz, in July, August or September.

In addition, it estimated the time it would take for export restrictions to eventually come off products like fertiliser and fuel.

It forecast the breakeven milk price would rise by $0.36 kg/MS to $8.79 kg/MS, if the Strait were to open as its economists "expected" in August, with fertiliser, feed, fuel and interest doing much of the heavy lifting.

Its head of economics, Mark Storey said fortunately, New Zealand dairy farmers had paid down a lot of debt recently, after two record seasons, which should provide a buffer for the next one.

"They are in quite a resilient state, they have paid down quite a lot of debt in recent seasons too," he said

"The other factor is the sector is I think in a much better place to withstand shocks like this going into the season, then perhaps was earlier in the decade."

DairyNZ's head of economics, Mark Storey.

Photo: SUPPLIED/DairyNZ

The group's updated economic survey for 2024/25 found it was one of the strongest financial years for dairy farmers in the past decade, driven in part by high milk prices.

But Storey said volatile fuel and fertiliser prices resulting from the Russia-Ukraine war never returned to pre-shock levels, which was a risk now.

"I think our concern, more to the point, is when we look at the impacts of other price shocks," he said.

"The more prolonged the conflict, the more likely this is going to flow into the season after. And the more likely these prices become not necessarily permanent, but elevated for for a longer time.

"The margins are actually tight and tightening, and that's the concern for this season."

Storey said the farmgate price related to revenue expectations.

"So our breakeven milk price is getting into the high 8s and that means there's not actually a lot of operating profit margin to work with," he said.

"It doesn't take much for that price to increase or potentially if the farmgate milk price comes in towards the lower end of the Fonterra range. Suddenly you move from a quite comfortable position into an operating loss position."

Storey said it had not factored in the possible El Niño weather effects yet, which could add spring pressure to budgets.

The 25/26 season finished strongly, when milk production surpassed 2 billion kg/MS nationwide, up 4.5 percent on the season prior.

It marked the second season in a row for the milk price sitting above $9 kg/MS.

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