NZ remains lowest-cost milk producer - report
The cost of producing milk in New Zealand continues to compare favourably with other exporting regions despite a lift in production costs over the past five years.
It describes the drops in the GlobalDairyTrade auction prices in July and early August as “truly awful” for New Zealand dairy farmers, but adds that the collapse does not equate to long-term structural market change in the sector.
In a new report released to its clients this month – Dairy Industry Note: Riding out the Storm – Rabobank says that while the dairy sector is experiencing a severe cyclical downturn the mechanisms that will turn the market around have now been triggered and a substantial improvement in prices is expected by mid-2016.
Rabobank NZ chief executive Ben Russell says the bank’s firm view is the long-term fundamentals for the dairy sector have not been altered by anything seen in 2015 and there are strong reasons to expect the medium term holds plenty of upside for the NZ dairy industry.
“Contrary to some recent analysis and commentary on the NZ dairy sector, Rabobank’s view is the current price trough is part of an extended negative phase of the commodity cycle and not a structural, permanent change to supply and demand dynamics,” he says.
“While the season ahead will undoubtedly be difficult for dairy farmers, the bank is firmly of the view that prices will recover to more sustainable levels over the medium term. Current market conditions are not the ‘new normal’, but a highly abnormal part of a difficult cycle.”
NZ remains well placed to continue to play an important and overall profitable role in this improved future for the global dairy industry, the Rabobank report says. “But first it must ride out the storm.”
Report co-author, Rabobank senior dairy analyst Michael Harvey, says the extent of the market collapse was, for most in the industry, “beyond expectation” and inevitably led to milk price forecasts for the 2015-16 season being slashed.
A 19% fall in prices over two GDT auctions in July and August took the market down from already painful levels to a low not seen since 2002 in FOB Oceania trade.
Given NZ production costs have increased significantly since 2002, you have to go even further back to find pricing this far below the cost of production, says Harvey.
The report notes that the global dairy market had already been well on its way to a correction in 2014 – from previous record-high prices – with prices starting to fall to choke off a wave of milk supply and encourage demand growth.
“Unfortunately, this downturn was then exacerbated by several other developments, including China slashing its purchases from the international market, Russia banning dairy imports from the EU and some other suppliers, plus EU dairy quotas being removed in April this year,” says Harvey.
The Rabobank report says a combination of factors has conspired to see NZ prices hit far harder by the downturn than those in other key dairy exporting regions.
“In this cycle, the pain has been asymmetrical, with NZ at the sharp end, and so far pretty alone,” Harvey says. “This has been for a combination of reasons, including a relatively strong NZ currency, our small domestic market and NZ dairy’s exposure to China and to whole milk powder, which are the worst-hit markets.”
Bank support
Rabobank country banking general manager Hayley Moynihan says that as an agri-banking specialist, Rabobank is well versed in dealing with the cycles of agriculture and is committed to supporting its dairy clients over the coming seasons.
“During the dairy market downturn in 2009-10, Rabobank was able to extend additional credit to its clients to get them through a difficult period so they could take advantage of the better years that followed.
“Rabobank also took on many new clients over those difficult years. This time our approach will be no different.
“We’re working closely with our dairy clients to minimise the size of any deficits and additional borrowings to ensure their businesses are as resilient and successful as they can be.
“Ultimately we take a long-term approach to banking rural businesses and we will stick by our clients through this difficult period.”
