The Country
  • The Country home
  • Latest news
  • Audio & podcasts
  • Opinion
  • Dairy farming
  • Sheep & beef farming
  • Rural business
  • Rural technology
  • Rural life
  • Listen on iHeart radio

Subscriptions

  • Herald Premium
  • Viva Premium
  • The Listener
  • BusinessDesk

Sections

  • Latest news
  • Coast & Country News
  • Opinion
  • Dairy farming
  • Sheep & beef farming
  • Horticulture
  • Animal health
  • Rural business
  • Rural technology
  • Rural life

Media

  • Podcasts
  • Video

Weather

  • Kaitaia
  • Whāngarei
  • Dargaville
  • Auckland
  • Thames
  • Tauranga
  • Hamilton
  • Whakatāne
  • Rotorua
  • Tokoroa
  • Te Kuiti
  • Taumurunui
  • Taupō
  • Gisborne
  • New Plymouth
  • Napier
  • Hastings
  • Dannevirke
  • Whanganui
  • Palmerston North
  • Levin
  • Paraparaumu
  • Masterton
  • Wellington
  • Motueka
  • Nelson
  • Blenheim
  • Westport
  • Reefton
  • Kaikōura
  • Greymouth
  • Hokitika
  • Christchurch
  • Ashburton
  • Timaru
  • Wānaka
  • Oamaru
  • Queenstown
  • Dunedin
  • Gore
  • Invercargill

NZME Network

  • Advertise with NZME
  • OneRoof
  • Driven Car Guide
  • BusinessDesk
  • Newstalk ZB
  • Sunlive
  • ZM
  • The Hits
  • Coast
  • Radio Hauraki
  • The Alternative Commentary Collective
  • Gold
  • Flava
  • iHeart Radio
  • Hokonui
  • Radio Wanaka
  • iHeartCountry New Zealand
  • Restaurant Hub
  • NZME Events

SubscribeSign In
Advertisement
Advertise with NZME.
Home / The Country / Opinion

Liam Dann: Recovery's still got a mountain to climb

Liam Dann
By Liam Dann
Business Editor at Large·NZ Herald·
7 Sep, 2014 05:00 PM5 mins to read

Subscribe to listen

Access to Herald Premium articles require a Premium subscription. Subscribe now to listen.
Already a subscriber?  Sign in here

Listening to articles is free for open-access content—explore other articles or learn more about text-to-speech.
‌
Save

    Share this article

There could be heavily leveraged dairy farmers causing concerns for their banks. Photo / Christine Cornege

There could be heavily leveraged dairy farmers causing concerns for their banks. Photo / Christine Cornege

Liam Dann
Opinion by Liam Dann
Liam Dann, Business Editor at Large for New Zealand’s Herald, works as a writer, columnist, radio commentator and as a presenter and producer of videos and podcasts.
Learn more

A dairy payout from Fonterra slumping below $5 will hit farmers and leave a huge hole in export earnings.

Here we are again, hearts in our mouths, as we watch an international commodity slump knock the shine off New Zealand's economic recovery.

Dairy prices are now down 44.5 per cent since their peak in February. Where will they settle? How serious could this be? That's the problem - nobody really knows.

Our bias is to hope for a moderate and measured market cycle. But that is seldom what we get. It is as good a bet as any that a market cycle will peak higher and bottom out lower than expectations. That seems to be the case with stock markets and certainly it has been the case with dairy - again.

The Russian boycott and subsequent glut of milk powder out of the EU comes at the worst possible time for New Zealand exports.

Advertisement
Advertise with NZME.
Advertisement
Advertise with NZME.

It had been hoped that prices would bottom out and rebound before the peak of the local dairy season. But last week's Global Dairy Trade auction proved they have not.

ANZ bank economists have picked Fonterra's farmer payout should now settle at $5.25 per kg of milk solids. But even that is based on the premise that prices will bounce back a little before the end of the season, which peaks in late October.

If they don't, the payout could go as low as $4.50, ANZ warned in a report after last week's auction.

We've already had dairy farmer representatives talking about farmers being comfortable as long as the payout doesn't drop below $6 (the forecast Fonterra is currently sticking to). It was a record $8.40 last year.

Of course, farmers plan through the ups and downs of price cycles. They will have been investing in farm maintenance and paying down debt over the last couple of years. They should mostly be in pretty good shape for one tough year.

But if the payout does slump below $5, there will be heavily leveraged farmers causing concerns for their banks.

Discover more

Agribusiness

Russia's ban hitting NZ milk prices

03 Sep 05:00 PM
Agribusiness

Farmers slam Nats' cattle ban plan

03 Sep 05:00 PM

Then there is the huge hole a dairy price slump leaves in New Zealand's export earnings. At $5.25, ANZ predicts the economy will take a hit of at least $5.1 billion.

It is not all gloom. The New Zealand economy should be robust enough to keep growing through the slump.

Advertisement
Advertise with NZME.

A lower kiwi dollar should give our manufacturers and tourist sector a boost. The Christchurch rebuild has a long way to run yet, meat prices are still strong and interest rates may now stay lower for longer.

At this stage we're just talking about a return to moderate growth after a year of strong growth.

But it is hard to escape the feeling of deja vu. The New Zealand economy and commodity cycles have been intertwined since this country was born. Despite all the years of talk it sometimes feels like they always will.

It's now nearly 15 years since Helen Clark's much-hyped Knowledge Wave attempted to address this issue and initiate a change.

How are we doing?

It would be unfair to say the tech sector hasn't performed in that time. The achievements of companies like Xero and dozens of smaller IT companies following in Rod Drury's footsteps are something to be proud of.

Advertisement
Advertise with NZME.

More broadly, the value of New Zealand's tech sector continues to grow every year. The 2013 TIN100 report showed local tech companies now have total sales of $7.2 billion - $5.3 billion from exports. Total revenue from the sector is up by about 25 per cent since 2007.

But to put that in perspective, the fluctuation in dairy earnings from 2013 to 2014 is roughly in line with total export earnings of the tech sector. Clearly it is not growing fast enough to add significant balance to our economy in the near future.

Moving New Zealand's exports up the value chain is still highly dependent on the food industry and efforts of Fonterra and others to shift their own balance from such a heavy reliance on commodities to branded consumer food products.

The two-tier nature of Fonterra's business mean there is some upside for the business when commodity prices are lower. The Fonterra Brands business has to pay a market price for ingredients so it earns a higher margin when milk powder is cheap and should deliver bigger profits.

The lower commodity price forces the company to put more emphasis on that added value business and rely less on bulk milk powder exports.

It would be wrong to argue that Fonterra has not been working hard to develop its Brands business. Shifting the balance of such an enormous operation is simply not easy. But progress since Fonterra's formation - about the same time as the Knowledge Wave initiative - has been slow.

Advertisement
Advertise with NZME.

The branded consumer foods market is extremely competitive. Fonterra is up against huge, well-established players like Nestle, Kraft and Danone.

It is higher risk, and there is a high degree of risk aversion built into the structure of a farmer-owned co-operative like Fonterra.

Last month's purchase of a 20 per cent stake in the consumer-focused Chinese dairy company Beingmate was a great example of Fonterra's efforts to move the business forward. But it remains risky doing business in China.

Fonterra's ambitions in China were set back significantly by the Sanlu disaster. It is now six years since that tragedy. If Sanlu had worked for Fonterra its farmers might already be in better shape to manage this season's price fluctuations.

As it is we'll have to resign ourselves to another commodity cycle of discussion and debate about how we get the balance of the New Zealand economy where it needs to be for the 21st century.

Save

    Share this article

Latest from Dairy

The Country

Huinga dairy farmer celebrated at national sustainability awards

18 Jun 10:37 PM
Premium
The Country

Luxon visits a great wall in China – and it has a message for him

18 Jun 05:00 PM
The Country

Meat and skincare on the agenda for PM's first day in China

17 Jun 11:36 PM

Help for those helping hardest-hit

sponsored
Advertisement
Advertise with NZME.

Latest from Dairy

Huinga dairy farmer celebrated at national sustainability awards

Huinga dairy farmer celebrated at national sustainability awards

18 Jun 10:37 PM

Brendan Attrill was named the 2025 National Ambassador for Sustainable Farming.

Premium
Luxon visits a great wall in China – and it has a message for him

Luxon visits a great wall in China – and it has a message for him

18 Jun 05:00 PM
Meat and skincare on the agenda for PM's first day in China

Meat and skincare on the agenda for PM's first day in China

17 Jun 11:36 PM
Premium
'Dark horse' emerges: Meiji named as potential bidder for Fonterra's Mainland

'Dark horse' emerges: Meiji named as potential bidder for Fonterra's Mainland

17 Jun 05:16 AM
How a Timaru mum of three budding chefs stretched her grocery shop
sponsored

How a Timaru mum of three budding chefs stretched her grocery shop

NZ Herald
  • About NZ Herald
  • Meet the journalists
  • Newsletters
  • Classifieds
  • Help & support
  • Contact us
  • House rules
  • Privacy Policy
  • Terms of use
  • Competition terms & conditions
  • Our use of AI
Subscriber Services
  • NZ Herald e-editions
  • Daily puzzles & quizzes
  • Manage your digital subscription
  • Manage your print subscription
  • Subscribe to the NZ Herald newspaper
  • Subscribe to Herald Premium
  • Gift a subscription
  • Subscriber FAQs
  • Subscription terms & conditions
  • Promotions and subscriber benefits
NZME Network
  • The New Zealand Herald
  • The Northland Age
  • The Northern Advocate
  • Waikato Herald
  • Bay of Plenty Times
  • Rotorua Daily Post
  • Hawke's Bay Today
  • Whanganui Chronicle
  • Viva
  • NZ Listener
  • Newstalk ZB
  • BusinessDesk
  • OneRoof
  • Driven Car Guide
  • iHeart Radio
  • Restaurant Hub
NZME
  • About NZME
  • NZME careers
  • Advertise with NZME
  • Digital self-service advertising
  • Book your classified ad
  • Photo sales
  • NZME Events
  • © Copyright 2025 NZME Publishing Limited
TOP