Reflecting on the 2025 Dairy Season
Key Takeaways
- Dairy’s had a pretty strong run this year. Farmgate milk prices remained strong, Fonterra’s 2025/26 with NZD $10/kgMS midpoint. High opening forecasts for 2025/26 are cautiously optimistic, but downside risk remains from volatility/demand in global markets.
- Production-wise, it depended a bit on where you farmed. North Island got hit with some dry spells—pasture growth really slowed up there for a bit. Nationally, we still saw milk production lift compared to last year.
- The big win for most farms was profitability. With both high payouts and interest rates easing a bit, a lot of farmers have been able to pay down debt. That’s taken a bit of the pressure off when it comes to servicing loans, and you can see that reflected across the sector.
Financial Performance
Strong milk income rebound:
Milk income per kgMS rebounded $9.87 in 2025 (from $7.95 in 2024), supporting a significant lift in gross profit and net profit margins.
Operating expenses up:
Total operating expenses increased to $6.25/kgMS, mainly due to higher feed with dry conditions, animal health, staff costs, and a modest rise in fertiliser.
Improved operating surplus and net profit:
Operating surplus increased to $4.35/kgMS in 2025 (from $3.20 in 2024), and net profit (before profit distributions) more than doubled to $2.56/kgMS.
Interest costs easing:
Interest expense fell slightly to $1.36/kgMS (down from $1.62 in 2024), providing some financial relief.
Strong Milk Returns Lower Debt Stress
Most farms are low risk:
87.5% of dairy farms sit in the ‘low vulnerability’ category (positive net profit and interest cover ratio above 1.5), indicating strong ability to service debt from operating earnings.
Limited vulnerability:
Only 2% of farms are in the ‘high vulnerability’ quadrant.
An additional 7.8% are profitable but have an interest cover ratio below 1.5, meaning some may face pressure if conditions weaken.
Profitability widespread:
The majority of farms are profitable and have comfortable interest coverage due to high milk prices and lower interest costs in 2025.
Further improvement likely in 2026 with lower interest rates and continued strong milk prices.
Dairy Debt Observations
Rapid Debt Reduction:
Average dairy sector debt ($ per kgMS) has steadily declined 12.5% from $19.51 (2022) to $17.07 (2025), with this lower level expected to hold into 2026.
This reflects strong debt repayment, enabled by improved cash flows and high milk payouts.
Lower Debt Servicing Costs:
Interest costs are falling, supported by both lower debt levels and a drop in interest rates, easing financial pressure on farms.
The debt service burden has eased, freeing up more cash for farm reinvestment or further repayments.
Looking Ahead
- NZ dairy sector profitability has bounced back strongly, thanks to resilient milk prices, high farm productivity, and falling debt costs.
- Most farms are now well positioned, with lower average debt and reduced debt servicing stress on the back of a 12.5% debt reduction since 2022.
- The outlook for 2026 is positive, but global market volatility and further weather swings may test current momentum.
- With robust fundamentals, now is a good time for strategic planning and reinvestment, keeping a focus on long-term financial health and sustainability.