Over the holiday break*, I was astonished by an anonymous NZ Herald editorial – “NZ economy is in a good place and thriving“. I blame the drivel in it on an inferior intellect being cooked in the warm holiday weather. It evidentially turned to mush and lazily regurgitated one of Bill English’s wet dreams. For instance…
Even before China’s glut caused diary prices to drop, New Zealand’s government was concerned the country had become too reliant on a single market. This year new effort must go into countries such as Indonesia, now with an impressive new elected President.
The stupidity of that statement is quite apparent when you consider a few basic facts. Perhaps the anonymous dingbat at the NZ Herald who wrote this editorial should read their more realistic writers. For instance on the 17th with “Fran O’Sullivan: Milk price could sour English’s optimism” or today’s article from Jamie Grey “Farm and Treasury jitters at dairy price”
Dairy farmers and the Treasury will be looking to 2015 and beyond with some trepidation after a 52 per cent decline in wholemilk powder prices over the past 12 months.
For the average Fonterra dairy farmer, the current $4.70/kg farmgate milk price forecast will not cover the cost of production this season, economists estimate.
The Treasury, in last month’s fiscal update, said its forecasts were based on a 25 per cent recovery in dairy prices taking place in 2016.
Going on the results of the last international dairy auction for 2014, which showed only a modest improvement in prices, the market has a way to go before Fonterra’s and the Treasury’s forecasts become a reality.
And the rest of the article is a exposition of clarity of the fix that our over expanded dairy sector has got itself into. While most farmers are pretty canny folk who don’t over-extend too far, but there is going to be a major shakeout of the rural sector and those regions that are heavily dependent on them over the next few years. It is rather inevitable when you look at the dairy sector without the comforting anti-panic shades on.
The major driver of dairy prices for NZ farmers over the last few years here has been the sale of wholemilk powder mostly for a baby formula into a vast market of chinese children. But the pricing issue is that wholemilk powder stores well and prices are related to supply as well as demand. Currently there is a lot of unsold stock sitting around the world and a lot of new capacity to produce more.
It appears that there is glut of stock in China and we have had a large stockpile of stock here compared to previous years when I looked at it earlier in the year. Even worse as Jamie Grey writes
Production has been strong in many other countries. In the United States, low feed prices have made milk production far more viable.
In parts of Europe, countries are increasing production in advance of quotas coming off next year and as Russia’s ban on western food products – mostly dairy – continues to destabilise the market.
Compared with the last quarter of 2013, wholemilk powder was the worst performer in 2014, dropping by 51.8 per cent, according to Global Dairy Trade data.
Mass marketing campaigns of product into places like Indonesia that the anonymous sunstruck mushhead wrote in their editorial do not flare into existence overnight. They take years to develop into significiant volumes in such markets where the demand has to be built first. Such markets are things that may influence demand in the 2020s or later but are damn unlikely to do much for years.
Moreover in a market where there is a glut of stock, high production capacities world wide, and an internationally traded commodity such markets are unlikely to significantly increase the farmgate price.
To me, this doesn’t look like a bust, but simply a classic case of the supply market finally catching up with demand. As such I’d expect prices to lift a bit towards the end of the year as stockpiles diminish. In the absence of other massive markets with inadequate domestic dairy being opened up in the next few years, dairy farmers here and world wide can expect normal prices at the around $5/kg or likely less to resume for a number of years.
* Back to work today. I am prepared to suffer the cool air of the airconditioning 🙂