Dairy's drop leads farm prices down

Fonterra's farmgate milk price for 2016/17 is just $4.25 a kg. Photo / Mark Mitchell

Farm prices are on the way down, led by an 18 per cent decline in the dairy sector over the past 12 months.

Real Estate Institute of NZ (REINZ) data showed prices for most farm types were down in June but that dairy copped the worst of it, reflecting below-cost dairy product prices.

Across the board, sales volumes eased significantly in all categories apart from horticulture, which remained stable, the institute said.

The Reserve Bank carried out a "stress test" of the five largest dairy lenders late last year to assess the banking system's vulnerability to the sector if product and farm prices continued to decline.

In a report released in March, the central bank said two scenarios were tested. The first scenario assumed that the dairy payout would recover to $5.25 per kilogram of milksolids by the 2017/18 season and that there would be a fall in dairy land prices of 20 per cent. Under the second scenario, the dairy payout was assumed to fall to $3 a kg in 2015/16 and remain below $5 until the 2019/20 season, with a fall in land prices of 40 per cent.

As it stands, Fonterra's farmgate milk price for 2016/17 is just $4.25 a kg - $1 short of the estimated average cost of production - although some commentators expect the milk price to be revised up as the season progresses.

David Tripe, an associate professor at Massey University, said dairy farm prices were clearly on the way down but that the decline could have been worse given the steep slide in dairy product prices since the peak of $8.40 a kg of milk solids in 2013/14.

"This is not as bad as the worst case scenario in the Reserve Bank's stress tests," Tripe said. "I think that there is a fair bit of 'wait and see' with this in terms of its severity and its potential impact on the banks."

Bank lending to the dairy sector currently stands at around $38 billion - about 10 per cent of the banking system's total lending.

REINZ's data put the median price per hectare for all farms sold in the three months to June at $26,361 - down 9.54 per cent on the same three months of 2015.

The institute's All Farm Price Index fell by 2.8 per cent in the three months to June compared with the three months to May and by 4.3 per cent compared with June 2015.

"From a pricing perspective, the Dairy Farm Prices Index indicates an easing of 18 per cent in the last 12 months, but only a 2.2 per cent drop from five years ago," said REINZ rural spokesman Brian Peacocke.

Fonterra, in its latest market update, said the problems that have afflicted the world market over the past two years - overproduction and slack demand from China - were showing signs of improvement.

European Union milk production in April increased 1 per cent compared to the same month last year - the lowest rate of increase since early 2015 with half of the top eight producers decreasing production compared to the same month the previous year.

On the demand side, China dairy imports increased by 30 per cent or 47,000 tonnes in May compared to the same month last year.

Futures market trading suggests that prices at tomorrow's GlobalDairyTrade auction will be flat to slightly weaker.