The dredded ‘R’ word

Stephen Topliss, of BNZ, was quoted as raising the prospect of a recession triggered by low dairy prices, the falling NZ dollar and the potential for a drought. 

And two Government ministers, Steven Joyce and Bill English, have also expressed concern in the past week about dairy prices. Asked on TV3’s The Nation if there could be a recession for two years, Joyce responded by saying ‘it’s going to be bumpy’ and conceded that in his view dairy prices might stay lower than predicted by Fonterra.

Finance Minister Bill English describes the slump in dairy prices as “concerning” and the indications are that the low prices on the GDT auction are likely to persist. But English claims dairy is only 20% of exports, that other sectors are performing well and that in the past the NZ economy has been “pretty resilient”. 

Meanwhile, ANZ rural economist Con Williams predicts the next quarter will be brutal for the dairy industry. He told Rural News some of the forces affecting dairy prices are “structural” and depending on what happens to the Kiwi dollar the lower dairy prices could continue.

ANZ has just lowered its forecast for the farmgate milk price for this season to $4.50-$4.75/kgMS – lower than what Fonterra has on the table, but in line with what other industry insiders have been saying in the last month or so.

“You’re getting this nasty price action because NZ has essentially been missing China, its largest global import market. For various reasons Europe has been missing its market which is Russia, so Europe is producing more skim milk powder and putting that into Africa, Asia and China. NZ has done the same but with whole milk powder and this is why you are getting the lower prices on the GDT.” 

Williams says the challenge for NZ will come with its increased seasonal milk volumes and the impact this may have on a market which is effectively oversupplied. He says ANZ predicts less milk will be produced in NZ this season as farmers react to the lower prices and cashflows. But he emphasises that the next few months will be difficult.

He says the effects of the low payout are being felt in the wider communities dependent on the dairy industry. Job security and cashflows in support areas are starting to be affected.

No one can say with certainty what might happen in the international dairy market. The international investment banker Goldman Sachs predicts a five year low in dairy prices, but in NZ even the most pessimistic are saying three years maximum.