THE FIRST QUESTION · THE LOAN · CAPACITY
Two borrowers each carry debt of three times EBITDA. One sells software on three-year contracts; the other builds new houses for sale.
// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON
Breakeven Milk Price: a Worked Example
The price at which the milk cheque just pays everybody.
BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED · 6 MIN READ
// THE SHORT ANSWER
A dairy farmer sets almost nothing about the price of milk, so a lender's first question is how low that price can go before the farm stops paying its way. The breakeven answers in one figure, per kilogram of milk solids. It is built from the farm's own costs, finance and family outgoings, less other income, then read against the prices seen over several seasons. Which costs go in varies, so a figure quoted without its basis means little. A bank's version usually carries principal, which the commonly published industry measure does not, and is shown before and after drawings.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// WORK THE SUM
Every Groundwork file that is a number to work out — cash conversion, debt service cover, expected loss, risk-weighted assets, the margin on a bank's own book — with the working shown in the senior read. One minute each, no signup.
PART OF Credit Analysis for Beginners
// 01 — WHY A BANK WORKS IN PRICE PER KILOGRAM
A dairy farm's income is a price times a volume, and the price is set far from the farm. Dividing every cost by production puts a small farm and a large one on one scale and turns a set of accounts into a single comparison: this is what the farm needs, and that is what milk has paid. New Zealand and Australian farms are generally paid per kilogram of milk solids (kgMS). UK prices are quoted in pence per litre, and the same arithmetic runs on that unit.
The timing adds to the risk, most visibly in New Zealand, where payments generally arrive as advances through the season against a forecast that can change, and the final price is known only after the season ends. A lender therefore compares the breakeven with the price expected now and with the range of prices the farm has lived through, because a farm can be comfortable at the forecast and have nothing left at the low.
// 02 — HOW THE FIGURE IS BUILT
Per kgMS:
farm working expenses
+ interest (and rent, where land is leased)
+ tax
+ scheduled principal
− other cash income (net stock sales and the like)
= breakeven before drawings
+ the owners' drawings
= breakeven after drawings
The basis needs stating. DairyNZ, the New Zealand industry body, publishes a breakeven made up of farm working expenses, rent and interest, tax and family drawings, less net stock sales and other dairy income, and notes that it does not include principal or capital spending. That is a measure of a season's cash position across farms. A bank asks whether this farm can repay this loan, so it generally adds scheduled principal and shows the result before and after drawings. Some lenders add maintenance spending too. The two versions can both be correct and still sit tens of cents apart.
// 03 — THE EXAMPLE
A New Zealand dairy farm, constructed for this page like every figure on it, produces 420,000 kgMS a season and owes NZ$16.00 of debt per kgMS at 6.5%. It has a scheduled repayment and the owners draw a family living from the business. The five-season price range below is also the example's own and is not a record of real seasons.
NZ$ per kgMS
Farm working expenses 5.10
Interest (16.00 × 6.5%) 1.04
Tax 0.15
Scheduled principal 0.45
Less other cash income (0.40)
Breakeven before drawings 6.34
Drawings 0.50
Breakeven after drawings 6.84
Industry basis (no principal): 6.84 − 0.45 = 6.39
With 0.25 of maintenance spending: 7.09
Season price Before drawings After drawings
6.30 −0.04 −0.54
7.00 +0.66 +0.16
7.60 +1.26 +0.76
8.10 +1.76 +1.26
8.50 +2.16 +1.66
Average 7.50
After drawings, this farm is short in one season of the five, by NZ$0.54 per kgMS. Before drawings it is almost exactly level at the low price, so in that year the decision about the farm comes down to the family's living costs. At the average of NZ$7.50, it has NZ$0.66 of room after drawings.
Two things move the figure that are not the price. One percentage point on the rate adds NZ$0.16 (16.00 × 1%), taking the after-drawings breakeven to NZ$7.00. A dry season that cuts production by 10%, with about a fifth of working expenses varying with milk and the other outgoings held fixed in dollars (tax would in practice fall), spreads the remaining costs over less milk:
Per-kgMS costs at 378,000 kgMS
Working expenses (5.10 × 0.8) ÷ 0.9 + 5.10 × 0.2 = 5.55
Interest, tax, principal (1.04 + 0.15 + 0.45) ÷ 0.9 = 1.82
Other income 0.40 ÷ 0.9 = (0.44)
Before drawings 6.93
Drawings 0.50 ÷ 0.9 = 0.56
After drawings 7.49
The price needed rises NZ$0.65 in the very year the farm has less milk to sell.
// 04 — HOW IT DIFFERS FROM COST OF PRODUCTION
Cost of production values the farming operation with notional charges so that any farm can be compared with any other. Breakeven uses what this owner actually pays. A well-run farm with heavy debt can have a low cost of production and a high breakeven. Farm working expenses are the largest piece of both, and the piece management can act on within a season.
Debt per kgMS sits beside it for a different reason. It says how much each kilogram must carry and changes slowly; the breakeven turns that burden into an annual price, at today's interest rate and repayment profile.
DEFINED IN ONE PARAGRAPH → · AGRICULTURAL LENDING → · COST OF PRODUCTION →
// 05 — WHERE IT DECIDES A FILE
The first question is the gap between the breakeven and a low-season price, and what would fund it. In the example the shortfall at NZ$6.30 has to come from the overdraft, a reduced budget or the family, and a lender wants to know which before that season arrives. Drawings get particular attention, because the family controls them and a limit on them can be made a condition of the bank's support.
The second is the repayment structure. Principal is NZ$0.45 of this farm's breakeven, so a period of interest-only lowers the bank's figure at once and leaves the debt where it was. That can suit a single bad season. It helps less if the breakeven sits above the low price because the farm's costs are high, which is the reason a lender reads the breakeven beside cost of production. A purchase or a succession changes the figure overnight, since new debt and new drawings go straight into the sum, so a lender works it out on the proposed structure before approving.
WHEN THE MILK PRICE FALLS → · ISSUE 03 · KAURI DAIRY HOLDINGS → · DEBT PER KGMS →
// SOURCES
The documents the statements on this page rest on. Each was opened and checked when cited.
- DairyNZ, Facts and Figures, chapter 2 (updated December 2021) — Breakeven milk price — Sets out a breakeven of farm working expenses, interest and rent, tax and drawings, less net stock sales and other dairy cash income, and states that it excludes principal repayments and capital expenditure — section 02.
// QUESTIONS PEOPLE ASK
- How do you calculate the breakeven milk price?
- Add the farm's cash outgoings for the season, such as working expenses, interest and rent, tax, and any principal and drawings you want included, subtract other cash income such as net stock sales, and divide by kilograms of milk solids produced. State which items went in, because published industry figures usually leave out principal and capital spending and a bank's figure usually does not.
- Does the breakeven milk price include drawings?
- It depends who calculated it. DairyNZ's published measure includes them, and a bank usually shows the figure both before and after them. The gap between the two is the part of the outgoings the family can change. In a low season, a farm that clears the first figure and not the second is one where the conversation with the lender turns to what the household can do without.
- What is a good breakeven milk price?
- There is no single good number, since it depends on the farm's own debt, system and costs and on the price cycle. The useful comparison is with the prices the farm has actually experienced. A breakeven comfortably under the low seasons means the debt can be carried through a run of them. One close to the average means the farm relies on the good years to repay.
- What can a farmer do to lower the breakeven milk price?
- The main levers are working expenses, drawings, the interest rate, the repayment profile and production. Cutting feed or fertiliser can save money this season at the cost of later production. Moving a loan to interest-only for a period lowers the figure the bank calculates without improving the farm, so a lender will usually want to see what changes in the farm itself.
// NEXT TO IT
- READING THE NUMBERSDebt per kgMSDebt, counted in the unit the milk cheque is paid in.
- READING THE NUMBERSCost of production (dairy)What the milk costs to make, before anyone has lent against it.
- READING THE NUMBERSFarm working expenses (FWE)The part of the milk cheque the farm itself decides.
- READING THE NUMBERSDebt-like itemsNobody calls them borrowings. The cash leaves all the same.
// ON WHOSE DESK
The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.
- Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
- Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
- Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.
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