As New Zealand dairy farmers shudder at the now real prospect their milk payout will sink to $6/kg this season, industry leaders are divided on how long global dairy prices could stay depressed.
But they agreed on at least three factors: weaker China demand was the main culprit; the sector is no stranger to shocks because the commodity trade is cyclic and subject to wild swings; and concern that the economy is in poor shape to handle the ripple effects of this dairy downturn.
Those effects include sharply reduced business for those servicing the $20-plus billion industry as farmers cut costs, and a major contraction in tax take for the Government due to farmers making losses.
“Farmers are going to share their pain,” a sector veteran, who declined to be named, said.
“Dairy is New Zealand’s biggest export industry. Farmers will be cutting their cloth to suit and the ripple effect for New Zealand is going to be colossal. The tax take will disappear.”
Fonterra shocked the industry earlier this month with a $1/kg cut to the mid-point of its milk price forecast range for the current 2023-2024 season, from $8 to $7/kg milk solids. Then this week there was a 10.9 per cent slump in the price of global whole milk powder (WMP) at the Global Dairy Trade auction, a reliable barometer of international commodity prices. The global WMP price has a strong influence on Fonterra’s farmgate milk returns. As the dominant industry operator, Fonterra’s milk price to farmers sets the country’s base price.
Now Fonterra has further reduced its forecast farmgate range, announcing on Friday a drop from $6.25-$7.75/kg, with a midpoint of $7/kg, to $6-$7.50/kg with a midpoint of $6.75/kg.
On Thursday, industry good body DairyNZ revised its national breakeven forecast to $7.51/kg milk solids for this season, from $8.16/kg. A further revision can be expected following Fonterra’s Friday announcement.
Fonterra’s earlier deep cut of $1/kg would wipe $5b off the country’s GDP, and most dairy farmers would make “significant” losses this year, said independent agri-economist Phil Journeaux at the time of the announcement.
Laurie Margrain, chairman of the country’s second-largest dairy processor and exporter, Open Country, is optimistic global supply and demand will be “more balanced” by the end of this calendar year.
“For the time being we see downward pressure still being applied due to lack of demand out of China. While China only makes up 20-25 per cent of our exports, demand there has an effect on market pricing,” Margrain said.
“Volatility is nothing new. The worry is we haven’t got the financial structure - debt is too high and we are not living within our means. It makes it even harder for the New Zealand economy to withstand these price cycles. We would say the people making the calls need to take a more responsible attitude to our economic position.”
An export veteran, who declined to be named, expected an upturn in prices within six months.
“Yes, demand is a bit soft but it’s a temporary thing. It’s part of the ordinary pricing cycle and more about [economic] sentiment and confidence, particularly in China,” they said.
“Demand hasn’t fallen off a cliff. Let’s not panic. I don’t think we will be in this situation in three to six months. It will come back.”
Former Fonterra deputy chair and Northland dairy farmer Greg Gent isn’t optimistic the Chinese shadow over the market will lift so soon.
Gent chairs one of New Zealand’s biggest farming operations, Dairy Holdings, and is an advisor to the boards of Chinese-owned dairy companies Shanghai Pengxin and Maui Milk.
“I’d see a couple of years of China’s problems - if I was optimistic.”
“Part of the tragedy of this price falling out of bed is that New Zealand needs every dollar of export receipts it can get and it’s almost getting to perfect storm stuff.
“China has some issues, they’ll take a little while to clear. [But] we’ve been through these [times] and will go through them again.
“As long as New Zealand stays the lowest-cost producer of milk in the world, we will come out the other side okay.”
Gent said given the exchange rate and this week’s GDT price slump, he couldn’t “imagine the milk price not having a $6 in front of it”.
“And not in the high sixes would be my guess. That puts everything under massive pressure, including NZ Inc.”
Fonterra does not announce when it will update its forecasts. But a statement sought from New Zealand’s biggest business said “the medium- to long-term outlook for dairy, in particular New Zealand dairy, looks positive with milk production from key exporting regions flat compared to last year”.
Meanwhile, asked if New Zealand was too reliant on the dairy economy, Gent said the country had tried for years to be more diversified.
But the fact was New Zealand had a primary industry economy, he said.
“As one of those people, I have felt incredibly unloved for a long time.”
Gent said he was referring to government treatment of farmers which had heaped compliance costs and bureaucratic demands on them.
“That culture of government has to change. We are not the villains. I agree with a green economy but you have to get it ‘with’ an industry, not beat the industry up to achieve the objective, which is how I have felt as a farmer for quite a while now.
“Bureaucracy is simply out of control on the farm...”
Agriculture Minister Damien O’Connor said the Government greatly valued the primary industries and “has worked tirelessly to support them”.
“We’ve consistently collaborated with the sector to address 21st century challenges. For example, the effort to eradicate Mycoplasma bovis, finding a practical way to do emissions pricing so we can future-proof biggest export sectors, working to amend Dira (Dairy Industry Restructuring Act), or listening to feedback and amending freshwater regulations have all involved input from the industry,” he said.
“Furthermore we’ve invested hundreds of millions of dollars into the sector to help it demonstrate sustainability credentials to international markets and in the process we’ve signed or upgraded seven FTAs in six years.”
Export industry newcomer Olam Food Ingredients, which is about to start milk processing at a $100million-plus plant in Tokoroa, expects “some recovery in the next few months”.
Senior vice-president dairy, Naval Sabri, said slower demand recovery than expected and higher stocks in China had led the markets to this price level.
“And with milk production expected to be better from New Zealand, it will create a surplus in the market, which is putting pressure on prices. Current dairy prices offer good value considering historical price levels, which will bring in some value buyers to curtail the drop,” Sabri said.
“Dairy markets have a tendency to bounce back quickly so we should expect some recovery in the next few months.”
Westland Milk Products chief executive Richard Wyeth doesn’t expect to see an improvement in milk prices until “at least Q1 next year“.
Wyeth said many factors were at play in the current price situation, but China was the main market that needed to improve.
Open Country’s Margrain said the company did not believe interest rates would drop “any time soon” but that farm debt levels would “look a lot more manageable” in 12 months.
Retaining a premium price in the future could be a problem, Zespri warns.