Darker days for dairy

ANZ economists have cut their milk price forecast to $4.35 per kilogram of milk solids, well below the break-even point for many struggling dairy farmers.

The bank’s downgrade represents an approximate $6.9 billion hit to overall dairy revenue compared to last year’s bumper season.

Dairy prices have finally started bouncing back from the five-year lows plumbed last year, with a 3.6 per increase in the first GlobalDairyTrade auction of the year.

However, ANZ said that was offset by the largest increase in supply from major exporters in eight years, with increased pressure from Europe and a growing domestic milk supply in China.

While oil-dependent nations had been a key source of demand in recent years, the ANZ economists said they were already seeing some pull-back due to collapsing oil prices.

If the forecast proves to be correct, it would be the lowest since 2007’s payout of $3.87, and almost half last year’s record $8.40.

Federated Farmers national dairy chairman Andrew Hoggard said the ANZ forecast was just one view, with Fonterra’s $4.70 guidance still the number to watch.

However, he said it was a sign that dairy farmers needed to be wary and cautious of more downside to come.

“You’d be looking at a seriously large percentage who would probably be losing money at that price.”

Even when the forecast was $5.50, Hoggard said around a third of farmers would probably need to borrow to get through the season.

Farming goes in cycles.  I would hope those that enjoyed the $8.40 payout would have put money aside for a leaner year.

ANZ also forecast a softer opening price for the new season around $5.75.

That meant farmers’ cashflow and ability to balance the books would be tightened “dramatically” over the next 18 months, ANZ said.

“A poor year followed by a marginal one is hardly lights out, but it will create stresses.”

The bank’s economists believed the outlook for the broader New Zealand economy was still respectable, though “hardly stellar”.

Milk prices were expected to gradually recover through the first half of the year, and gather momentum in the second half.

The all-important milk powder category was expected to recover to around US$3300-$3500 ($4250 to $4500) per tonne by early 2016.

No new ute, and maintenance will need to be deferred.  Most farmers have been through this before.  As have their banks.  On the good side, things look like they’ve bottomed out, and the next few years will see opportunities for recovery.

 

– Richard Meadows, NZ Farmer


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As much at home writing editorials as being the subject of them, Cam has won awards, including the Canon Media Award for his work on the Len Brown/Bevan Chuang story.  And when he’s not creating the news, he tends to be in it, with protagonists using the courts, media and social media to deliver financial as well as death threats.

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