Supply problems play on payout outlook

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.