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Dairy prices still going down

Written By: - Date published: 8:51 am, May 8th, 2014 - 51 comments
Categories: Economy - Tags: , , ,

Yesterday the global dairy trade auction was held. This is the market place that tends to drive the internationally traded price of dairy products. Prices are still going down as they have since Feburary. The rate of decrease was less than previous drops. Only 1.1% rather than the colossal drop on April 1st. Hopefully this means that the prices are starting to stabilize at a new level.

GlobalDairyPriceIndex-2014-05-08-b

 

GlobalDairyPriceIndex-2014-05-07-a

But what does this all mean for the NZ economy? Well what better source than our Reserve Bank governor; Graeme Wheeler. Yesterday he gave a fascinating speech to DairyNZ in Hamilton entitled “The significance of dairy to the New Zealand economy“.

The essence of which to me was that the international dairy trade of whole milk powder to China saved our arse (and probably the arse of the National party)  during the latter part of the global financial crisis.

But that for NZ to carry on solely depending upon growth in it is risky. Other big milk producers like the US are seeing the value of our trade to China and will/are gearing up to take a large piece of that action. The Chinese government itself is trying to  improve the quality and production of milk and derived products. It is interesting to see that dairy farmers themselves are increasingly cautious about further value growth – as expressed in their investment decisions.

I’ll probably write more on this over the next week. But here are some more graphs to entice readers to have a look at the speech.

Dairy exports in $NZ

Dairy exports in $NZ

Export market shares (average annual percentage for given year)

Export market shares (average annual percentage for given year)

Share of primary exports to China (annual total)

Share of primary exports to China (annual total) “China is our largest export market for every agricultural commodity except beef (where it is our second largest market behind the United States). It purchases a third of New Zealand’s dairy exports “

Chinese imports of dairy products

Chinese imports of dairy products “A second risk is that a strong competitor enters the Chinese market and threatens our market share. New Zealand supplied over 70 percent of China’s dairy imports in 2013”

Dairy debt (June years)

Dairy debt (June years) “Dairy debt almost trebled over the past decade, and currently stands at $32 billion. It is concentrated among a small proportion of highly leveraged farms with around half of the dairy debt being held by only 10 percent of dairy farmers. Strong export earnings saw the sector’s debt to income ratio improve between 2010 and 2012, although for the decade as a whole this ratio tracked steadily upward”

Value of farm sales and credit growth

Value of farm sales and credit growth “Dairy farmers are therefore generally taking a cautious approach in the knowledge that the current high prices can turn around quickly. This is encouraging to see given the vulnerability of the sector and its already high debt load.”

&&&

51 comments on “Dairy prices still going down ”

  1. philj 1

    xox
    Pity we have to sell our principles/ethics/soul to survive economically. The late Sir Paul Callahan said that Dairy farming was never go going to give Kiwis a rising standard of living

    • RedLogix 1.1

      Or as a less erudite but equally smart mate of mine once pointed out; there are roughly 4.2m dairy cows in NZ, for a population of almost the same – and your average Maasai tribal leader would probably be very worried if his ratio of cattle/people had dropped that low.

    • dave 1.2

      the standard should post sir paul callhams presentation from the 2011 labour party congress its an eye opener

  2. Ennui 2

    Fantastic information, it really makes for interesting reading. Well done LPRENT, what was the main source?

    The really interesting thing for me are the geo-political implications. Things like the TPP. China India and Russia recently signed an agreement to become an Asia trading block in raw resources like oil, the clearances to be in gold. The US and Europe are clearly out of alignment with this, it signifies the transition of the existing economic hegemony to the emerging super powers. The US dollar may no longer have primacy in international trade transactions.

    What has gone under the radar in the media here is Obamas announcement of the “Asia Pacific axis” strategy. It signifies the end of the “war on terror”, and introduces the militarisation of the Pacific region by US forces to contain Chinese regional and eventual world hegemony.

    What does this mean to NZ? To early to tell but one thing is certain: it will affect our trade relations with one of the parties. We cant afford to lose China, the rest of the world we cant afford to lose either. We are caught between a rock and a hard place.

    • lprent 2.1

      …what was the main source?

      The two links in the post and a brief mention of the two upcoming events in the NBR on tuesday.

      • lprent 2.1.1

        Duh! I wrote that as I was heading to work.

        The first two graphs are from auction site. The remainder are in Wheelers speech that I linked to.

        • greywarbler 2.1.1.1

          Also it could have been accessed from the comment that I put in Open Mike yesterday, which perhaps nobody except Colonial Viper read, as there was an appointment for guying Judith Collins which most people here attended. I perservered however with some factual stuff about the economy now and forward-looking as below.

          At 22 Open Mike 7/5
          Links to Graeme Wheeler address
          also
          usa dairy competition
          also
          our sixth successive drop in milk price
          and link on
          Invermay closure
          also
          fodder for drought

          and at 16, and 16.1, comments on Kauri bonds and the World Bank
          and how trading in our currency is increasing demand and keeping the price of our currency up,
          and how that is also upwardly affected by the leveraged purchase of NZ dairy prices as referred to in the Reserve Bank governor’s address.

          Followed by a comment from Colonial Viper at 16.1.1 from 8 May at 12.15 am (working in the middle of the night) –
          We’re the obedient well trained pet of international financiers and money managers, lucky us.
          BTW the big aussie banks b[u]y Kauris using the massively excess funds they suck out of Kiwi workers through their usury and high bank fees.

          • lprent 2.1.1.1.1

            Could have been. I literally don’t remember where I first read some of the stuff that I see. About half of my brain these days seems to be used on how to Google something I remember as being correct.

            Too many programming languages and libraries, and a wee touch of politics and history.

            But it was an interesting speech

    • Colonial Viper 2.2

      It signifies the end of the “war on terror”, and introduces the militarisation of the Pacific region by US forces to contain Chinese regional and eventual world hegemony

      Hmmmm I usually expect better and less ethnocentric analysis from you, Ennui. Of course, I agree with you that NZ has to walk a fine line in the coming years, but some of your assumptions are well off IMO.

      Firstly, the US “war on terror” has been going on continuously for over 10 years, and I believe it will keep going on, perpetually. Neither Obama nor his officials will undercut the perfect rationale for their ongoing implementation of the security and surveillance state, for massive military budgets, the stripping back of every US citizens rights and civil liberties, and of course the occasional drone strike/mini-war. Therefore, your statement that we have reached the end of the (very politically useful to the power elite) “war on terror” is, I believe, poorly founded.

      Secondly – “containment” is a geopolitical and military strategy developed during the Cold War, and was the positioning of the world’s richest, greatest military and economic power against the military moves of a single powerful enemy – the Soviet Union.

      It is also a strategy which is utterly unsuitable for use against China. The Chinese economy now matches the US one in spending power, and a block of India/Russia/China/Brazil as powerful developing countries economically outmatches the struggling US. Note that US power is more and more having to rely on military and security state tactics; the degradation of the position of the USD as the reserve currency of choice over the next few years will worsen this effect.

      More to the point, US corporations today absolutely rely on China as both a market and a factory.

      Do you think that the US will therefore be willing to fight proxy wars against China as was done during the Cold War against the USSR (Afghanistan), or in North Korea and Vietnam against the Communist Chinese? Not only is China a major nuclear power but China has successfully surfaced one of its attack subs in the middle of a US carrier group, and has also demonstrated it’s ability to kill satellites in orbit. Does the US really want to go there, or to encourage it’s east asian proxy Japan to go there?

      And finally, comment needs to be made on the assumption that China has any interest in an expansionist global “hegemony.” China as always wants to be the major regional Asian power, and it wants strong trade ties around the world – same as throughout the last 1000 years, incidentally. But building a global empire under its effective control? It think you may have mistaken China for another country. Speaking of “world hegemony” please remind me which nation currently operates or controls over 700 military bases around the world, uses mercernaries in many foreign lands and foreign wars, actively ensures that its corporates are dominant in every global market, and has mass surveillance capabilities which reach into the communications infrastructure in every country?

      • Ennui 2.2.1

        CV, fast answer, I will send some links later, its a case of joining dots.
        On the “ethnocentric analysis”, well off the mark. There is none intended or given.
        Some answers:

        Firstly, the US “war on terror” has been going on continuously for over 10 years, and I believe it will keep going on, perpetually When Osama is dead, and you are forced to pull out of Afghanistan because you cant win (like Vietnam), and public opinion is moving against the “war”, as the military industrial complex you need a “new enemy”. The “war on terror” has played its part but in the mind of the public it is running down so what better than budgets against a “new” threat. This has been planned for and is well documented.

        Do you think that the US will therefore be willing to fight proxy wars against China…as a matter of fact I don’t BUT I think the US (read corporate / financial / military industrial complex) has no option than to resist further Chinese economic growth and power. In short they are “owned” and the US$ is no longer looking invincible. By contrast the Chinese are aware of the money owed them by the USA, they don’t want it to go west. It is the most unhealthy Catch 22 situation you can imagine.

        “the assumption that China has any interest in an expansionist global “hegemony.” Empires are pretty much always money centric, exploitative. The average Yank probably has no imperial ambitions, nor I suspect does the average Chinese. The logic of “empire” however pays no attention to the ambitions of the citizen. Its a balance sheet exercise, and Chinese balance sheets are constructed the same way as US balance sheets.

      • Tracey 2.2.2

        george bush one and two missed the opportunities the cold war gave… the war on terror fills that gap nicely.

        i agree with you, it wont be over anytime soon.

        bin laden apparently said that 9/11 was about making americans unsure in their own land as his people felt from america in theirs. he never needed to do more than that day to achieve it.

    • Draco T Bastard 2.3

      We cant afford to lose China, the rest of the world we cant afford to lose either.

      I really do wish people would stop spreading such tripe.

      We have the resources necessary to support ourselves. Trade does very little for us.

      • Lanthanide 2.3.1

        Depending on the quality of life you want to live, yes.

        • Draco T Bastard 2.3.1.1

          We can maintain near equivalency.

          • Lanthanide 2.3.1.1.1

            Yes, with our cutting-edge $2B CPU fabs with state of the art technology and expertise.

            Oh wait, no, we can’t build those fabs, we don’t have the needed expertise. I guess we’ll just have to trade for high technology that we can’t build ourselves, or otherwise accept a lower quality of life.

            Kiss all your iPods, smartphones, PS4’s and XBones goodbye.

            • Draco T Bastard 2.3.1.1.1.1

              You know, back a few years the US couldn’t build them either. Neither could Taiwan, nor China nor Korea.

              We can build the capability.

              • Lanthanide

                It took decades of standing on the shoulders of giants in order to get the semiconductor industry up to where it is now.

                The other thing about “lets stop trading with everyone else” means it’s very hard to actually attract the necessary expertise to the country.

                • Colonial Viper

                  Oh fuck it Lanth (and DTB), in 20 years no one is going to give a shit about the new Samsung Galaxy S25 if they have a working but ancient Nokia 1100, because trying to get enough unadulterated uncontaminated food for your family into your household is going to take up most of your week, not worrying about the latest 0.2NM process dodeca-core CPU chipset.

                  The other thing about “lets stop trading with everyone else” means it’s very hard to actually attract the necessary expertise to the country.

                  It takes the availability of a massive energy surplus to employ large numbers of highly specialised professionals. That energy surplus is going away. The queues of unemployed university graduates is only going to grow.

                  • Draco T Bastard

                    because trying to get enough unadulterated uncontaminated food for your family into your household is going to take up most of your week,

                    That may be true in some places in the world, it won’t be true of NZ.

                    It takes the availability of a massive energy surplus to employ large numbers of highly specialised professionals.

                    Which NZ will have – if our government gets smart and builds numerous wind farms, helps get solar on every house and builds the infrastructure so that we can make them here.

                    The real hit that NZ will take from the decrease in fossil fuel availability will be in international trade and we’re not doing anything about it.

                    The queues of unemployed university graduates is only going to grow.

                    /facepalm

                    Contradict yourself much?

                    BTW, we had universities long before we had fossil fuels. We’ll have them long after.

                    • Colonial Viper

                      BTW, we had universities long before we had fossil fuels. We’ll have them long after.

                      Sure, but we’ll have universities for the 4% as was the case in Newton’s day, not for the 40%.

                      Which NZ will have – if our government gets smart and builds numerous wind farms, helps get solar on every house and builds the infrastructure so that we can make them here.

                      To use an aphorism from the Archdruid’s blog – I agree that all this could happen in theory, but it won’t, not even in 3 terms of Labour/Green government (which by the way is the last chance this country has to get truly ready for permanent energy depletion).

                    • Draco T Bastard

                      Sure, but we’ll have universities for the 4% as was the case in Newton’s day, not for the 40%.

                      Nope, for the 100%. We’ll need well trained and educated people to do the necessary R&D. Back when we were pre-industrial most people didn’t work anywhere near as hard as people think. The reality is that we work harder today than at any other time in history. IMO, as we get the rich off of our backs, become more self-sufficient and international trade decreases we’ll actually work less while having more.

                      I agree that all this could happen in theory, but it won’t, not even in 3 terms of Labour/Green government

                      If, after three terms of Labour/Greens we still haven’t got them then even National is going to have to admit that we need them.

                • Draco T Bastard

                  It took decades of standing on the shoulders of giants in order to get the semiconductor industry up to where it is now.

                  Ah, no it didn’t. It took decades of government funding the necessary research. Research, BTW, that we don’t have to do because it’s already done.

                  The other thing about “lets stop trading with everyone else” means it’s very hard to actually attract the necessary expertise to the country.

                  1.) I didn’t say anything about stopping trade
                  2.) We already have necessary expertise and so don’t need to attract any more.

                  • MaxFletcher

                    “Ah, no it didn’t. It took decades of government funding the necessary research. ”

                    Yes Draco, that’s decades of standing on the shoulders of giants.

                    • Draco T Bastard

                      Nope. It was just people doing research that anybody in NZ could do just as well – if the government had bothered to support them. No giants involved.

                  • Phil

                    You’ve been pushing this line for many years, but it’s full of holes.

                    Firstly, you’re ignoring the very real, and very large, fixed costs of all the infrastructure and PME required for NZ to build/manufacture its own everything. International trade is of enormous benefit to New Zealand because we can and do obtain goods and services that otherwise would be, per unit, far too costly to produce ourselves. Then there is also the opportunity cost of the start-up investment – what would we have to stop doing to begin making our own cars and computers? We are, after all, only 4-ish million people

                    Secondly, I get the feeling that you’re mixing up the impacts of absolute and comparative advantages of trade, and then creating an extreme conclusion you think an economist would argue; we shouldn’t do anything because someone else can do the same thing more cheaply. That’s an incorrect interpretation of economics and a demonstrably false conclusion.

                    I acknowledge there are some very real global concerns about market power and monopoly, and the impact these have on trade outcomes and ‘fairness’. But, by and large, these are issues that can/could be much more efficiently solved through regulation and competition law than what you’re proposing.

      • Ennui 2.3.2

        So Draco, do you remember what happened the last time we “lost” a market? Don’t you remember the restraints on trade and the panic that set in when UK joined the EEC and we lost free access to their markets?

        I suppose we could have become totally self sufficient then but we didn’t. And we never will unless forced to because we do not have a natural resource base to support even a fraction of what we think we require. Yes we can grow lots and lots of food, but metallurgy…different issue, not much in the way of ores here. Chemicals…no sources of all sorts. Technology, yes we are good at it but we cannot cover all bases, and hey, it uses raw materials like rare earth elements that we can only get by trade.

        As the oil goes west the whole world will change, and we will change with it. Until then as a national entity we will trade, and if we lose access to a third of the worlds market in one hit we will suffer. In the light of that is the statement about “we cannot afford to lose China” invalid?

        • Colonial Viper 2.3.2.1

          Yes we can grow lots and lots of food, but metallurgy…different issue, not much in the way of ores here. Chemicals…no sources of all sorts. Technology, yes we are good at it but we cannot cover all bases, and hey, it uses raw materials like rare earth elements that we can only get by trade.

          You didn’t need much palladium or germanium to live a good life in 1960.

          The answer is the ‘appropriate technology’ movement of the 1970’s where it was recognised that a very decent living standard could be achieved using the technological basis of the 1950’s and 1960s augmented by the odd bit of robust modern technology.

          But lets get serious – the starting point for self sufficiency is an import substitution programme (as Sutch would have termed it) – and it is not about making our own quad core CPUs and MRI machines, it is about making our own shoes, clothes, furniture, glassware, toasters, trains and a million other daily items that this country used to be able to manufacture, and mostly using its own local resources.

          As for chemicals stock. NZ has coal. What more chemical stock do you want than that.

          • Draco T Bastard 2.3.2.1.1

            and it is not about making our own quad core CPUs and MRI machines,

            But considering that we can do so even without oil we may as well.

        • Draco T Bastard 2.3.2.2

          So Draco, do you remember what happened the last time we “lost” a market?

          Yeah, actually, I do. IMO, it’s part of what drove Muldoon’s Think Big as he tried to make NZ capable of getting over such a shock because the only way to ensure that such a shock doesn’t cause such havoc again is to be more independent.

          And we never will unless forced to because we do not have a natural resource base to support even a fraction of what we think we require.

          And that’s where you’re actually wrong. We actually do have those resources available – we just have to smart about using and recycling them.

          Mineral Commodity Report 17 – Rare Earths and Related Elements

          and if we lose access to a third of the worlds market in one hit we will suffer.

          Don’t think I mentioned doing that either and even in losing China we’d still have the rest of the world to trade with. To me it’s more a question of working to become self-sufficient so that we don’t need to trade to maintain our living standard.

          • Colonial Viper 2.3.2.2.1

            It also means a ground-up reassessment by society what we actually mean by a “good standard of living.”

            We have accepted for too long the US corporate consumerist definition: the cars, TVs, fridge freezers, etc that your household has.

          • Chooky 2.3.2.2.2

            E, CV and DTB…..interesting discussion for all us chooks…and thanks for all the references….very interesting

            ….on balance I agree with DTB…lets go as self sufficient as possible

            …although i dont trust USA corporates /corruption /expansionism/imperialism….nor do i trust China re imperialism/expansionism/corruption and invasion by population…having travelled through Tibet and knowing how this country has been invaded, economically exploited and culturally trashed and the Tibetan population swamped by newcomers

            ….a much increased population in New Zealand by new immigrants is not going to do much for the average new Zealander’s standard of living imo…in fact competition for resources will get worse eg housing, education , health and race relations….however it will line the pockets and increase corruption of the Nact wealthy corporate oligarchy

            ….agree also that we have to redefine what we mean by a “good standard of living”….and this will mean going back to a more egalitarian and frugal society

          • Phil 2.3.2.2.3

            We actually do have those resources available – we just have to smart about using and recycling them…. To me it’s more a question of working to become self-sufficient so that we don’t need to trade to maintain our living standard.

            You and I use much more water, energy, and other resources, to grow veges in our own backyard, than the large-scale ‘corporate’ growers do.

            Am I self sufficient? Yes.
            Is this a good use of my limited time and resources? No.

            • Chooky 2.3.2.2.3.1

              @ Phil…..oh so if they can grow more cheaply … using less water, energy, and other resources eg labour exploitation/paying a pittance ….eg. in China ie using “large -scale ‘corporate’ growers”…..then it has to be better and New Zealand should import !!!!?….no one believes this!!!! ( sprays ? herbicides?animal welfare ? soils? contamination? exploitation of labour)

              ….not to mention alienation from your own means of production and food and quality of life

              ….i doubt very much in any case that corporate growers are more economical with water, energy and resources than the backyard grower….much more likely to be wasteful and exploitative of those resources in pursuit of capital gains

              You ask: “Is this a good use of my limited time and resources? No.”

              Question:…well what else would you be doing I wonder.?….making more money?….not necessarily QUALITY of life…which is the whole point trying to be as self sufficient as possible

            • Draco T Bastard 2.3.2.2.3.2

              False equivalence.

              A society isn’t a single individual and can do everything that is required to provide it with its desired living standard because of the individuals within in that specialise.

              That said, over-specialisation by the individuals within society is a bad thing as people lose connection with what’s happening around them and thus make bad decision regarding the direction of society.

              • Chooky

                “thus make bad decision regarding the direction of society”….and the environment.

  3. Ad 3

    Can anyone alert Rod Oram to respond to this?

    Needs concentrated debate ESP re productivity, risk to Fonterra, added value, etc.

  4. Bearded Git 4

    As I posted yesterday interest.co.nz says dairy prices are down 27.5% since the beginning of the year in $NZ terms. The high dollar, still going up, is stuffing exports.

    • Ennui 4.1

      What I would really like to know is how much export receipts for dairy are, and by corollary what profits are retained in NZ and what capital outflow this causes. i have long suspected that NZ is losing the war to keep profits local, that the concept of a farmers owned dairy sector is long defunct on the basis of farm debt to international capital (banks).

      • Tracey 4.1.1

        can you explain to mean what if any implication can be drawn from our heavy reliance on dairy but it only amounting to about 8% of gdp, as part of all agriculture?

      • lprent 4.1.2

        That would be my bet as well. I rather suspect that a rather smallish fraction of that money earned actually circulates in the local economy for any length of time.

        Wheelers speech notes has some striking material about the level of indebtedness of dairy farmers.

        • Ennui 4.1.2.1

          Yes and I suspect that the TPP is one play to lock this in and force NZ to allow ownership of farms outright to reside outside of the farmers. Really though if somebody owes you eniough they become a wage slave to interest rates so you dont have to invest a lot of capital nor own deeds to land…….

  5. Saarbo 5

    Recently I was at a Rabobank presentation where they highlighted that NZ’s cost to produce Dairy Products is fast catching up to US/Europe, one of the reasons for this is we are feeding our cows more expensive supplementary feeds but the main reason was:…Interest Cost…, because our farmers are now so debted up buying neighbours farms etc. Farming debt is over $50b and Dairy’s share is above $31b I think. What this means is the biggest beneficiary of our dairy proceeds are the Aussie (and a Dutch) banks.

  6. Huginn 6

    For all it’s faults, Fonterra is a NZ owned producer co-op – it’s returns generally going back to NZ farmers. French food giant Danone is beginning to challenge that model.

    (Reuters) – France’s Danone SA (DANO.PA) will buy milk formula processing and packing factories in New Zealand to replace supply lost by terminating contracts with the Fonterra dairy cooperative (FSF.NZ) following a food safety scare last year.

    The world’s largest yoghurt maker is suing Fonterra whose report of contamination prompted client Danone to recall products, including its Karicare and Dumex milk formula brands. Fonterra later said the scare was a false alarm.

    Danone, through local subsidiary Nutricia, has agreed to take over Gardians’ drying plant and Sutton Group’s blending and packing plant, enabling Danone to maintain and increase infant formula exports to China where demand is particularly high.

    http://uk.reuters.com/article/2014/05/01/uk-danone-newzealand-mergers-idUKKBN0DH2AK20140501

  7. Philj 7

    xox
    Factor in the environmental cost of dairy degradation which is ignored, and the economic risk of the dependancy to NZ Inc, and you have a market boom and bust where e con o mists are no all no nothings. I lol

  8. Sacha 8

    The biggest cost of allowing amateurish clowns like Judith Collins to represent NZ in China will be to our reputation for quality and integrity. If other nations can do a better job of reassuring China they are reliable trading partners with genuine food quality systems and sound national governance then they’ll displace us.

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