Dairy setbacks worldwide

Farmers over optimistic.

A recovery in the dairy sector could be two or three years away while low oil prices continue to weigh on the market, says United States Dairy Club chairman Ejnar Knudsen.

The not-for-profit club represents some of the largest US dairy producers and processors, market analysts, upstream agri input companies and downstream food firms.

Knudsen, also chief executive of private equity group A-GR Partners, said he was not optimistic that a recovery was around the corner but he was nevertheless positive about the sector's long-term prospects.

After leading a team of 70 US dairy farmers from the club around New Zealand - hosted by ASB and ASB Agri Capital - Knudsen said it appeared locals were optimistic about an imminent turnaround.

"Everyone in the dairy industry around the world is losing money right now and I think that people here are a bit more optimistic that it is coming back this year," Knudsen said.

"My observation is that that is a little bit optimistic," he said.

"I think [the dairy industry] will come back, but it might be two or three years before it comes back."

Fonterra's latest forecast is for a farmgate milk price of $4.15 per kg, just over a dollar short of DairyNZ's estimated break-even point of $5.25 a kg. ASB Bank economists expect the milk price to come in at $3.90/kg this season, rising to $6/kg next season.

Farmers, after last year's very low milk price, face the prospect of two, or possibly three, successive years of negative returns thanks largely to low wholemilk powder prices.

KPMG, in its latest banking survey, said bank provisioning relating to dairy loans remained below levels seen in the years just after the global financial crisis. But KPMG said many of the banks had already begun a review of their largest exposures in a bid to identify and work with potentially problematic loans.

Massey University banking expert David Tripe said, while the banks might already be losing their sense of humour, calling in loans might not necessarily be the best solution.

"Rushing out to sell the farm does not necessarily solve the problem immediately, so I would expect [banks] to be starting to have some discussions with people about what kind of options that they might have," Tripe said.

In the US, farmers also face negative returns, although not as badly because domestic demand for fluid milk, cheese and butter is buoyant.

- NZME