Jamie Gray is a business reporter for the NZ Herald

Another price cut on cards for dairying

Farmers tipped to face a drop in their milk returns to as low as $3.90 a kg next month.
Photo / Bloomberg
Photo / Bloomberg

Dairy farmers should know by this time next month whether the current $4.15 per kg farmgate milk price can be maintained, but the latest GlobalDairyTrade auction suggests a cut is on the cards.

If a revision does happen, it will most likely be when Fonterra reveals its first-half result on March 23.

... when you're talking about one in 10 farmers feeling the squeeze that's a worrying statistic.
Federated Farmers dairy chairman Andrew Hoggard

Private forecasters predict a downward revision, with ASB bank suggesting a $3.90 per kg milk price for the current season, following last season's milk price of $4.40 a kg.

Farmers now face the prospect of two, or possibly three, years in a row of negative returns, with farmgate milk prices now well below DairyNZ's estimated breakeven point of $5.40.

Westpac is forecasting a Fonterra farmgate milk price of $4 this season and $4.60 in 2016/17.

ASB rural economist Nathan Penny said the auction reinforced the bank's view there would be two more cuts in the Reserve Bank's official cash rate - one in June and one in August - taking the rate to 2 per cent.

Overall, the GDT price index fell by 2.8 per cent from the last sale on February 3, but not by as much as the 5 to 10 per cent decline suggested by futures market pricing.

Wholemilk powder prices, a key part of Fonterra's farmgate milk price, fell by 3.7 per cent to US$1890 a tonne.

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Dairy futures point to weak demand
Open Country Dairy cuts milk payout below Fonterra's forecast

Some analysts said the market seemed close to reaching a bottom.

Some blamed depressed dairy prices on a mismatch between supply and demand on the world market and they did not expect to see a big lift in prices over the next six months.

Fonterra last month cut its farmgate milk price forecast for the 2015/16 season to $4.15 a kg of milksolids, down from a previous forecast of $4.60 a kg, in response to weak international prices.

Federated Farmers said lower auction prices would add to pressure on dairy farmers. A member poll showed more than one in 10 were under pressure from banks over their mortgage, up from 6.6 per cent in August and 7.6 per cent in November.

"So far we've been pleased with the support of banks and their long-term view of the dairy industry, but when you're talking about one in 10 farmers feeling the squeeze that's a worrying statistic," said Federated Farmers dairy chairman Andrew Hoggard.

The Reserve Bank estimates the level of debt in the dairy sector at $37.9 billion.

ANZ upbeat about dairy prospects

It has forced people to look at their business models, their systems, and their cost structures to make some changes.Ross Verry, ANZ

ANZ, New Zealand's biggest rural lender, remains positive about the dairy sector's prospects, despite the prolonged trough in dairy prices.

The bank's New Zealand general manager for agri, Ross Verry, said yesterday's GlobalDairyTrade auction, where prices dropped by 2.8 per cent, showed that conditions remained difficult for New Zealand producers.

"It's certainly very tough for a lot of our customers."

About 80 per cent of dairy farm businesses are estimated to be unprofitable at current dairy prices.

"It has forced people to look at their business models, their systems, and their cost structures to make some changes," he said. "In the meantime, farmers have got to make their way through these loss-making years and, as banks, we've got to support them as best we can."

This point in the cycle had been lower and longer than previous cycles "so it's a bit more challenging".

ANZ has a high exposure to the rural sector, in part through its purchases of the Rural Bank and National Bank.

Verry said there were many businesses within its portfolio that were capable of absorbing two or three years of losses, or of adjusting their businesses to make a profit.

"The longer-term outlook is still strong. It's a good industry. We like it, and we are still one of the lowest cost producers in the world."

Verry said ANZ was advising farmers to be conservative and realistic in their budgeting.

The good

Auction index fell by 2.8 per cent but it was less than the 5 to 10 per cent futures market pricing implied.

Indications are that the market may be either at, or close to, a bottom.

China is returning to stronger growth of New Zealand dairy imports.

Solid demand continues in Asia and Latin America.

2015/6 season is sure to be shocker, but some expect a lift in 2016/17.

Southern Hemisphere milk production is contracting.

The bad

Wholemilk powder prices, about 75 per cent of Fonterra's farmgate milk price, were off by 3.7 per cent.

Another important product, skim milk powder, dropped by 1.4 per cent.

Northern Hemisphere production, especially in Europe, keeps forging ahead, resulting in world oversupply.

The ugly

NZ farmers now face a near certainty that they will suffer two or even three successive years of negative returns.

Farmers are likely to become increasingly reliant on bank credit.

Low dairy prices will hit economic growth, and may add to pressure to cut official interest rates.


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