In its latest Situation and Outlook report, MPI says some of the most heavily indebted dairy farmers may have difficulty servicing their debt even with the higher payout predicted by Fonterra for next season. It says the higher payout will benefit some but not all farmers.
But Primary Industries Minister Nathan Guy is not too concerned about the debt in the sector, saying dairy farmers have been good at repaying debt and have realised the country has been in a tricky situation.
“Of course the $7 payout forecast by Fonterra has been extremely well received and that is going to help farmers repay the debt. Drought affected some farmers by up to $100,000 – some more, some less depending on the locality of the farm. The debt is an issue but by and large farmers have responded by paying it down.”
Guy says Fonterra and other milk companies are signalling an incredibly bright future. “The world wants to consume more of our products because we’ve got the best food safety system in the world,” he says.
Dairy sector debt has trebled in ten years to reach $30.5 billion, the report shows. About half is held by 10% of farmers. While the level of debt is in itself concerning, the dairy sector’s expansion must be kept in mind. MPI says it would be more concerned if the debt had been incurreed for non-productive rather than productive purposes.
The debt is due mainly to dairy conversions, in particular higher land prices, MPI says. This leaves a “significant number” of dairy farmers vulnerable to a fall in the price of milk or a fall in land prices.
And the drought has hit especially North Island dairy farmers with a double whammy – lower prices and less production. The drought’s impacts are, predictably, reflected in the drop in milk production of 1.2% to 1.65 million tonnes MS for this season. Dairy export revenue was also down 5.5% to $12.9 billion due to a combination of the drought, lower prices and the higher exchange rate.
But it would seem that this is just a blip: a modest increase in production to 1.70 million tonnes MS is predicted for the 2013-14 season, rising to 1.95 million by 2017. Revenue from exports is also predicted to rise in the new season by 8.1% to $13.9 billion and will reach $17.7 billion by 2017.
Like the minister, MPI is upbeat about dairying’s future: expect to see nearly 500,000 more cows by 2017 as conversions to dairying continue. But despite this expansion, the likelihood of the industry achieving the Government’s goal of doubling exports by 2025 is slim; other sectors are not enjoying the same growth as dairying.
China is now New Zealand’s biggest market for dairy products (23% of exports), followed by the OPEC countries and SE Asia; the European Union takes a mere 3%. With butter OPEC is top of the list, then SE Asia and China. The EU market, in which New Zealand fought hard in the 1970-80s to retain butter access, is a shadow of its past – now taking just 6% of total exports.
But with this shift in exports to Asia and China there is a word of caution, timely given recent hiccups in China over meat exports. The report notes that “cultural and language differences are the foremost barriers for New Zealand companies doing business with emerging markets”. It goes on to say that “long term proactive and strategic thinking by companies and government will be needed to overcome these challenges”.
The report’s authors might have also added that companies and government agencies need to have a very good understanding of the way bureaucracies and the machinery of government operate in the new and emerging markets. Some long-time exporters and trade associations have great expertise which can be easily utilised.
