Thursday, 21 May 2015 09:58

Supply problems play on payout outlook

Written by 
Current oversupply is causing price problems for the dairy sector. Current oversupply is causing price problems for the dairy sector.

The payout to dairy farmers next season is unlikely to improve over the current season, says KPMG’s global head of agri, Ian Proudfoot.

Fonterra’s payout for the current season is $4.50/kgMS.

Proudfoot told Rural News that while he doesn’t have the models to calculate a payout, current knowledge and experience suggests little change is likely. 

The problem for the dairy industry is one of supply and demand and this will not get back into equilibrium within the next 18 months, he says. There would need to be a major disruption to global supply – such as a big drought somewhere – to force up the price of corn in the US and so put pressure on the US system to cut back production.

The last time the farmgate milk price dropped in New Zealand and then bounced back the next season was due to adverse weather. But Proudfoot says the present crisis is not due to weather, but more fundamental changes in the supply and demand in the market.

“To my mind there is a couple of key drivers. In the US corn is incredibly cheap and farmers are strategically making decisions to grow their share of the global traded dairy market. And the political situation in Russia is not getting any easier.  

“Consequently that is having quite a play in how products are moving. Then there is this whole change in the quota system and, regardless of what you will think happens in the average season – the markets we compete in will see more product.”

Also, in China domestic milk production is increasing and the Chinese Government is encouraging local businesses to use domestic production. 

All things considered, the growth in the world market is not fast enough to absorb this extra production. Proudfoot believes the farmgate price for milk will be set low –  advance payments of $3 to $4 – which means farmers will have to budget very carefully.

Rationalisation possible

Proudfoot says the current crisis in the dairy industry could trigger some rationalisation in the medium term.

He says a report by the Canterbury Development Corporation on high value land in the region suggested conversion from dairy back to other land uses was possible, but not in the short term. 

And DairyNZ has commented that farmers operating high input systems will not immediately be able to scale down their operations because they are effectively locked into the system they have.  

Proudfoot says conversion away from dairying will not happen soon because many of those in dairying have a lot of debt and there haven’t been enough good seasons to clear this debt.

 “But when you look out five to ten years or more, people will be looking at what is going to be the high value product opportunities in the market. We will see some innovation in what people grow. 

“If you go back 10, 15 or 20 years, dairy wasn’t our largest category of exports. It’s become that because the market was there.”

Proudfoot reckons investors will be looking at innovative foods and proteins and any new opportunities. One obvious example is sheep milking and expanding goat milking. There are opportunities to use land differently.

“Two or three poor dairy seasons in a row will start to focus people’s attention on whether dairy is their long term best use of land,” he says.

 

More like this

Risky business

OPINION: In the same way that even a stopped clock is right twice a day, economists sometimes get it right.

Bagrie bags banks

OPINION: Noted economist and self-promoter Cameron Bagrie took one look at KPMG's recently released Financial Institutions Performance Survey on banks and zeroes in one key number that suggests banks are so risk averse in this country that they are probably stifling growth and innovation.

Organic Dairy Hub liquidation process continues

The liquidation of failed co-operative Organic Dairy Hub is continuing, and net proceeds will be distributed to farmer shareholders once final tax obligations have been met, according to the liquidators.

Featured

Fencing excellence celebrated

The Fencing Contractors Association of New Zealand (FCANZ) celebrated the best of the best at the 2025 Fencing Industry Awards, providing the opportunity to honour both rising talent and industry stalwarts.

B+LNZ launches AI assistant for farmers

Beef + Lamb New Zealand has launched an AI-powered digital assistant to help farmers using the B+LNZ Knowledge Hub to create tailored answers and resources for their farming businesses.

National

Machinery & Products

Tech might take time

Agritech Unleashed – a one-day event held recently at Mystery Creek, near Hamilton – focused on technology as an ‘enabler’…

John Deere acquires GUSS Automation

John Deere has announced the full acquisition of GUSS Automation, LLC, a globally recognised leader in supervised high-value crop autonomy,…

Fencing excellence celebrated

The Fencing Contractors Association of New Zealand (FCANZ) celebrated the best of the best at the 2025 Fencing Industry Awards,…

» Latest Print Issues Online

The Hound

A step too far

OPINION: For years, the ironically named Dr Mike Joy has used his position at Victoria University to wage an activist-style…

Save us from SAFE

OPINION: A mate of yours truly has had an absolute gutsful of the activist group SAFE.

» Connect with Rural News

» eNewsletter

Subscribe to our weekly newsletter