Pain likely for NZ dairy farmers as glut caused by Russian shut-out mires global market
Dairy farmers in this country can expect to come under financial pressure if milk powder prices remain low and tensions in Europe continue to mount, say economists.
A one-year ban instituted by Russia on food imports from the West has played havoc with the dairy trade.
Last month, Russian President Vladimir Putin implemented a retaliatory ban on countries that had earlier placed sanctions on Russia for supporting pro-Russian separatists fighting Ukrainian government forces in Ukraine along the Russian border.
Russia is the second-largest global importer of dairy products and accounts for 12 to 15 per cent of the trade, which means thousands of tonnes of EU dairy product is finding its way onto other markets.
International dairy product prices fell again at the latest GlobalDairyTrade auction, reflecting the effects of Russian sanctions and increased local supply as the season nears its peak around October-November.
A build-up of dairy inventory in China has also depressed prices.
Overall prices were down 6 per cent from the previous sale a fortnight ago and 42.2 per cent lower than a year ago.
Since the most recent peak in February, prices are down 44.5 per cent.
Yesterday's decline came as a surprise as the market had showed signs of stabilising at the previous auction two weeks ago.
Big falls were registered at the auction in the two key segments for New Zealand producers - whole milk powder and skimmed milk powder.
Fonterra last month stuck by its $6 a kg of milksolids farmgate milk price for 2014-15, which some commentators said was too optimistic.
On the strength of the auction, ANZ Bank cut its 2014-15 milk price forecast to $5.25/kg while ASB and Westpac put their $5.80 a kg forecasts on review.
"Question-marks surround China's inventory situation, and European production needs to find a home elsewhere given Russian sanctions," ANZ said. The bank's rural economist Con Williams said that if the present market prices persisted, the farmgate price would be more akin to "somewhere in the mid $4s", meaning most farmers would not be able to cover their cost of production.
"It's difficult to see a catalyst for any uplift in prices by the end of the year," Williams said.
"That means that there is quite a material gap between Fonterra's current milk price forecast of $6 and where spot prices are at now," he said.
Westpac senior economist Anne Boniface said the risks for her $5.80 price forecast were "skewed to the downside".
"Given recent price action, a downgrade to Fonterra's forecast would come as no surprise," she said.
While farmers will enjoy carryover payments from last year's record season, Boniface said yesterday's auction result would "potentially make life more difficult" for dairy farmers.
Prices for whole milk powder and skimmed milk powder fell by 4.3 per cent and 9.5 per cent, respectively, at the auction.
The effect of the Russian ban showed up prominently in skimmed-milk powder prices, which have dropped by 26 per cent since sanctions were announced.
In times of surplus production, Europe makes more skimmed milk powder and butter because of a longer shelf life compared with other products, and government support programmes.
The Russian ban means thousands of tonnes of dairy product that would normally be destined for the Russian market is finding its way into the mainstay of New Zealand exports - milk powder.
The European Commission last week said it would open "private storage aid" to alleviate the impact of Russian restrictions on imports of EU dairy products and to limit the negative effects on the internal market.
Just days after Fonterra's forecast last month, the country's second biggest co-operative and major skimmed milk producer, Westland Milk Products, said it would cut its payout by 60c a kg of milksolids to a range of $5.40 to $5.80 a kg in the coming season.
NZ growth could be hit - ANZ
New Zealand's economic growth could be affected if the price of its biggest export - milk powder - remains low, says ANZ Bank.
The bank has cut its forecast for Fonterra's farmgate milk price for 2014/15 to $5.25/kg compared with the co-op's own forecast of $6 a kg.
ANZ says if its forecast is right, it would represent a $5.1 billion (or 2.2 per cent of GDP) hit to dairy revenue compared with last season.
"The hit to cash-flow isn't as bad as the headline numbers, but it's a hit nonetheless," the bank said.
"While farmers are still backing an improvement in prices later in the season and cash-flow looks better than the headline result, it's unlikely to be slash and burn."
ANZ said the key to whether financial stress might ensue would be the dairy outlook for 2015/16.
"If there is another skinny year this is where cash-flow starts to dry up." The outlook was now akin to the Reserve Bank's March 2013 monetary policy statement, with its "upside and downside" risks.
On the downside were the falling dollar and a "wobbly" global scene. But ANZ said the economy still had "pep", with expected GDP growth of 3 per cent next year.