Is Dairy Rooted?

The boom in the New Zealand economy has been led by massive dairy intensification. It is also the driver behind silly socialist projects like the Ruataniwha Water Storage Scheme where townie councillors have bought into government and Federated Farmers spin about the future being dairy and they are promoting economic models based on boom years that are unsustainable in bust years. Even so the proposals can’t work without massive subsidies or government grants even in boom years.

Yet no one has really stopped to question what the real long-term price of milk solids is, and if it is a sustainable long-term path to prosperity for New Zealand.

After last years boom prices there was not much consideration to what was going on world-wide, especially with the Chinese Market.

In the Sydney Morning Herald, their business editor wrote a good article comparing dairy in New Zealand to iron ore in Australia. I slammed it at the time, but have had a bit more of a think about it, plus some additional research over the holiday break.

Uppity Kiwis feeling boastful about their dollar approaching parity with the mighty Aussie might do well to stick to rugby for their kicks. Their China-driven boom is coming to an end as quickly as Australia’s. And they have less to fall back on when it does.

Meanwhile, reports of Gina Rinehart going long on dairy farms could prove as reliable a warning as many another billionaire diversifying outside his or her area of expertise.

The New Zealand economy’s resurgence has owed much to China’s demand for milk products and getting in early for a comprehensive free trade agreement with the Middle Kingdom.

Trouble is, China has been busily investing and encouraging others to invest in increased and globally diversified milking. Just as iron ore miners have ramped up production both from existing provinces and new projects from Africa to Mongolia, New Zealand’s farmers are facing increased competition from South America to Russia and all points in between, including Australia.

[…]   

The ubiquity of the Chinese approach tends to be missed by Australian commentary focused on iron ore. The standard Australian view of Chinese commodity demand is based solely on a housing and infrastructure boom devouring steel.

It’s funny then that milk prices have rather neatly matched iron ore prices since the 2013 peak. Who would have thought milk solids were a key ingredient of steel?

The first phase of the milk boom came in 2007 when the Global Dairy Trade index more than doubled to 1691.

It collapsed as the global financial crisis took its toll, recovered and reached a secondary peak in April 2013 of 1573. Iron ore had its own secondary peak in February 2013 of US$154.64.

The GDT index held up through 2013 but was one-way traffic in 2014, back to 753 in mid-December. Iron ore averaged $US73.13 in November. Spooky, how those cows and iron ore miners correlate.

So what is happening to the Dairy Price around the world? The arse has fallen out of it. In Britain it is now cheaper to buy milk than water at the supermarket.

Milk is now cheaper to buy than bottled water, and the squeeze on margins has led the UK’s largest dairy company to withhold payments to its farmers.<

First Milk, a Glasgow-based co-operative owned by British farmers, said that payment to 1,000 suppliers would be delayed for two weeks, following a “year of volatility that has never been seen before.”

“We don’t know how long this current market downturn will last, and we are aware that hundreds of UK dairy farmers are unlikely to find a home for their milk this spring,” said its chairman, Conservative MP Sir Jim Paice.

So there is excess supply in Britain. And in China too.

Small dairy farmers in China are dumping milk and selling cows as demand from processors slows in a sharp turnaround from last year, when a scramble for supplies prompted a huge surge in milk powder imports.

Slower growth in milk product consumption, higher yields from modern dairy farms and the excess stocks of imported powders have combined to reduce demand for fresh milk in what has been one of the world’s fastest-growing dairy markets.

Some of the issues with dropping milk solid prices might be alleviated with the current drought, a mixed blessing for farmers who are culling herds. By doing so they are reducing supply, and by reducing supply the market will correct and prices will rise…the farmers should be praying for droughts in China as well.

 

– SMH, Reuters, The Telegraph

 


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  • SkeptiK

    Kiwi farmers won’t have the same sort of problems as most overseas. They can rely on high domestic prices to partially offset the crash on the international markets.

    • NoVictim

      I think the domestic component of Fonterra sales is only about 5%, cant see that helping much, not sure if you can call it high domestic prices either.

      • SkeptiK

        My point really was that water might be dearer in UK supermarkets, but not in our supermarkets!

        • NoVictim

          4L of milk for $7 at BP according to a poster above, dont know how much bottled water is, but probably about that. Also remember UK dairy farmers are subsidized by the UK taxpayer.

  • Dave_1924

    Those who have a properly set up debt/equity funding model and didn’t buy farms at stupid prices will be fine in a long run I reckon. The excess supply at the moment will dry up a little as those who modelled their businesses on $6.50+ payouts from Fonterra will go to the wall. So the Overall Industry will re-balance to a more sustainable cost model

    maybe some of the more marginal conversions will stop as will which will slow supply growth.

    PLUS: World population is going one way for the foreseeable future, and demand in the long run will expand

    Could be tough for a few years but it will settle and be a steady earner… imo

    But the real key here is product differentiation based on quality control and brand name building. NZ needs strong brands, back by rigourous quality to command premium prices on the shop floor for its products…

    • Agree, those who bought their farms at inflated prices, some to ensure their parents have a nice retirement, are going to burn a bit.

      Those in for the long haul will be fine. The market has a way of weeding out the idiots in all industries.

    • CheesyEarWax

      Yes, our milk, beef, sheep, basically anything thats from the land are sought after. There is plenty of growth left in China because of the expanding middle class, not to mention other developing countries like India that is untapped.

    • Michelle

      you have to feel for some who bought farms last year and have had a rough start with weather and the previous owners leaving them with no feed
      l know of a couple of farmers in that boat with young children
      Especially losing cows to the tick disease and hungry cows with no supplements and still not good for them
      They will either limp along till they get sold up or will pull it up and hang in there

      • Dave_1924

        Its a tough life being a farmer no doubt. But It is a business and therefore I don’t feel sorry, though that sounds cruel.

        I would happily sit and talk to a farmer and let her or him or them get the stress out on a personally level – because thats what good people do they relate and help.

        But on a business level if they bought a business on High Price to Earnings ratios at the top of a bubble then I would have zero sympathy – new entrants have to make better choices in any industry otherwise they are doomed for financial disater and personal anguish

        • Michelle

          These farms we considered at the low end price wise and a good investment but mother nature sets the scene and you only have one or two things go wrong like unexpected cow deaths then drought

          • Dave_1924

            Understand Michelle. bt again its abusiness and the capital pool committed should have been sufficient to fund the purchase and have a reserve to ride out a couple of bad years as well. I know I am being ahrd from a business sense but there are lots of small non-farm businesses that go to the wall all the time through poor capitalisation and paying to much to set up or buy a going concern….

            Hope your friends strap in and ride it out, and reap the benfits when the commodity pricing recovers….

          • Michelle

            Yep it is the way it goes and in business you have to look after your lot and no one else’s
            Farming makes you capable of doing so many things
            l was thinking today how when the prices were down and we were starting out that we fixed everything ourselves then as we got in a better position on a good year we would “maybe” get it fixed by someone else, sharing the money with our local town but in bad years it was back to fix it ourselves and our kids learnt that as well how to problem solve and fix things

  • ex-JAFA

    I heard that the bottom-falling of UK milk was because Russia embargoed EU products in retaliation for sanctions over Ukraine – which would mean they’d buy from us instead.

    Input from someone who actually knows about this stuff would be welcome.

    • dgrogan

      I’m sure Russia would love to buy more of our milk powder – but can they afford to pay for it?

      • Odd Ball

        Swap for some more Lada’s?..,or perhaps some mig fighter jets, so we can sort out those pesky pirates in the Southern Ocean…

    • kehua

      They probably would if NZ was prepared to up the market there, I recall reading that the `powers that be` in the Milk industry were not going to take advantage of the EU situation!!!!!!!! I can imagine if it was our product embargoed the EU producers would be in boots n all.

      • ex-JAFA

        Yep, especially as it was the EU that screwed us on our longstanding contracts with the UK.

  • CouchKumara

    I gave up drinking milk a couple of years because I just don’t see it as a necessity food to buy at the cost that it was on the shelf. I haven’t missed it at all, I may buy it very occasionally if someone in the house wants it for cereal or mashed potato but gone are the days of drinking it by the glassful. Black coffee tastes fine. I notice that the price is still expensive at my local PNS. I now see milk as a luxury product not a necessity.

    • Greg M

      Same here. I use milk for coffee only now, weet bix is good with water, and you don’t need milk with bacon and eggs.
      I actually think there is a real danger that milk will become a non essential on the shopping list if the price keeps going the way it’s going.

    • Mags

      Me too. I don’t drink milk although I love cheese but only eat it occasionally. Looking at the price of milk, the 1kg block of cheese is cheap if my understanding it takes 10 litres of milk to make 1kg of cheese.

  • Jaffa

    So why is milk so dear here?

    • Grizz30

      Milk is cheap. You may not believe me, but think about it. You have to grow a whole paddock of grass, graze cattle, milk them every day, promptly ship the product off to a factory where it goes through several processes before it is put in a bottle, kept refrigerated and sold before it spoils. At the same time you need about 50L of water for every litre of milk. You have to maintain strict hygiene and environmental standards. Now compare that to the cost of sugar and water which does not need refrigeration and has a far longer shelf life.

    • caochladh

      If the Greens take the Treasury Benches, maybe Wussel will force us all keep a cow in the back garden to keep the chickens and the pig happy.

  • kiwihornplayer

    4 Litres of MeadowFresh at your local BP service station for $7. Compare that with bottles water. Nothing to complain about there.

  • Yeahright

    Like all tradable commodities they have there ups and downs, like a sine wave, the trick is not to buy at the peak, buy at the low. the problem is that the banks allow people to buy at the top with no way of paying when things drop. There is no due diligence on both sides. If you buy at the top you have be able to be able to afford at the bottom!!

    • Jafarma

      I’m not sure I entirely agree with that. If Bank’s are lending to a customer long term they wont just look at last years milk price. Where they differ though is that bank’s have differing risk appetites (policies) some of which are driven by a desire for more market share and that can impair their long term view of viability. And as some will know (depending who they bank with) what goes round comes round. Some farmers are actually counter-cyclical i.e. they are looking to buy now when prices are likely to ease, and they are not too highly geared.

      • Yeahright

        I know a few farmers that have brought at the peak and are wondering how they are going to pay their next bank payments?! Banks lend to easy, as they have the land to fall back on, this is a fact, no responsibility, sure the figures have to add up, but where is the due diligence. Also know of farmers who have lost everything, and then there’s the resent “escapes from life”

        • Jafarma

          Many will be wondering where they are going to meet their next payments from, not so much this season due to good final payouts from last season, but next winter / spring given current forecast payments. Even those moderately geared may need some deferrals of payments and/or more working capital.
          But the key remains long term i.e. if they have to capitalise a loss over the next 12 months, will they still survive long term. That’s how customers and banks should be looking at it.
          Alas though, those banks that have taken more of a view to lend based on adequate security rather than long term viability (and after the GFC and droughts, many farmers by now have figured out which bank’s are just fair weather friends and which ones will stick by you when times get tough) will have more problems with customers than others and will now be having to face up to their ‘asset/security only’ focused lending policies.
          It’ll be interesting to see whether many farms come onto the market over the next 6 months because of financial pressure, and which bank’s are associated with these; I’d pick the nos. will relate to the risk appetite bank has adopted over the past few years.
          And down the track what becomes more interesting is which customers decide to shift banks because their current bank didn’t look after them when times got tough. I understand there are some very interesting and enlightening stats around on that.

          • kehua

            It will be extemely tough if they hads to go through another dry spell like last season, a swith all things financial it really depends upon the amount of equity involved .

          • Jafarma

            Yes ultimately that’s what it boils down to if the cashflow can’t be fixed

  • Cadwallader

    It isn’t rooted. Like other commodities the fortunes of the dairy industry will be tidal. It is worth looking at the roller-coaster ride which is forestry. It is quite good at present but in the past 25 years or so it has been up and down a lot. At the end of the day if a product is a real product intended for a real market reality restores fortunes.

  • sandalwood789

    Is dairy rooted? No, I don’t think so.

    Ok, China may have a drop-off in demand for the next couple of years or so but there are still other markets that have barely been touched. India, for example – I don’t think we ship much in the way of dairy products to them.
    South America and Africa too – they surely have a lot of growth potential.

  • cows4me

    I agree with just about everything that has been said, which is a worry in it’s self. It’s been said many times but I’ll say it again, farmers are their own worst enemies. Many have gone out have paid insane prices for land as well as investing in high input feed systems. Neither are sustainable and there is a power of grief coming down the line. Most will ride this year out with the help of the banks but next year will be the killer if the payout stays at these levels, I know a few that will be having sleepless nights. Many are now laying off workers and going on once a day and doing the work themselves. My wife and myself have been doing this for years, we farm by the KISS principle. Just this morning she said she had paid some provisional tax. I said the buggers better enjoy it there will be sweet stuff all next year. I hate to say it but what is happening in the country will eventually reach a town near you, no one will not suffer some effect either directly or indirectly.

    • Sagacious Blonde

      A bio-security outbreak i.e. foot and mouth, will finish New Zealand and farming off faster than Fonterra and falling dairy prices ever will.
      I had an interesting discussion not long ago with a former palm kernal importer; he got out because he couldn’t reconcile the bio-security risks involved in importing from countries with foot and mouth.
      We are naive sitting ducks- look at the Kiwifruit industry for example.

      • cows4me

        To true. Fonterra talks sustainability and gets all hot and bothered about the environment, hypocrites, then pushes farmers to feed millions of tons of this crap to lift production, they make me spew.

  • Jafarma

    Re these comments “Yet no one has really stopped to question what the real long-term price of milk solids is, and if it is a sustainable long-term path to prosperity for New Zealand. After last years boom prices there was not much consideration to what was going on world-wide, especially with the Chinese Market.”
    All those bank’s which have a significant exposure to dairying – ANZ, ASB, BNZ,

  • Bruno 32

    Dairy is far from rooted. We can still produce milk cheaper than any other farmers in the world. This is a wake up call to those promoting feed barns, robotic milking, feeding expensive supplements and forgetting the competitive advantage their business is based on .irrigation refines our competitive advantage. You can grow grass all year and walk the cows out to eat it.

  • Nebman

    Everyone is forgetting that the Russians are out of the market which has taken a major competitor out of play and effectively let China set the market price for over a year now.

    Also don’t confuse the market for milk with that Fonterra do. Totally different products and they have a huge value added focus.

    The milk Fonterra sells is a tiny (think single percentage figures) part of their revenue stream.

  • Doc45

    The supply/demand situation is predicted by most knowledgeable commentators to turn around again in 2017/18 with a significant shortage by 2020. While China has become an important market there are also plenty of other opportunities emerging like Brazil, Mexico, Russia, Bangladesh, to offset the vagaries of the Chinese market.
    I am concerned that farmer owned and governed cooperatives do not have the right incentives to move away from commodities into more profitable products. The fresh blood coming into the industry since deregulation haven’t really led the changes that were expected. Maybe new models are needed.

  • Kopua Cowboy

    Yawn- more navel gazing rubbish. Dairy is here to stay

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