BNZ economists are estimating that Fonterra's cut to its milk price forecast will chop nearly $2 billion from dairy industry revenues this year.
The giant dairy co-operative (Fonterra) last week lopped, in effect, $1 per kilogram of milk solids off its forecast milk price for farmers this season - reducing the 'midpoint' price of its forecast to just $7kgMS.
The move by Fonterra followed a series of weak results at the GlobalDairyTrade auctions. Overall dairy prices are down 13.4% (in US dollar terms) since the start of 2023, and down a whopping 42.4% since peaking in March 2022.
In BNZ's weekly Markets Outlook publication, senior economist Doug Steel said if Fonterra's milk price forecast cut to farmers is broadly indicative of conditions across the wider industry, "and there is no reason to think otherwise", then it represents a reduction in industry revenue in the order of $1.9 billion.
"And compared to last season’s milk price, which is likely to be finalised around $8.20, it represents a revenue reduction of around $2.25 billion," he said.
"For Fonterra farmers’ cashflow, there are some offsets such as a higher percentage of the forecast milk price being paid earlier this season, funds from recent asset sales to be returned this month (equating to around 50c / KgMS), and the prospect of a higher dividend return.
"But milk is the main source of revenue, and the price cut hefty."
Steel pointed out that dairy is NZ’s largest export earner, "so material changes are of macroeconomic importance".
Lower dairy sector returns will have flow-on consequences through regional areas and the wider national economy. Real economic activity will take "a noticeable hit" especially when "second round multiplier effects are taken into consideration".
"The forecast milk price reduction from the previous season equates to around 0.6% of GDP. Including second round multiplier effects, it is not difficult to see this as a headwind of as much as 1% of GDP or more."
Steel said the BNZ economists had "long been cautious" on the near-term milk price outlook and primary product prices more generally.
"It is one reason we anticipate relatively weak domestic consumption and investment, [the] forecast for which we may well have lowered further recently had it not been for some offsetting strength in population growth via net migration."
Steel noted that it is not just dairy export prices that have softened but prices for NZ’s other major primary exports as well, including recent "material weakness" in lamb prices (against a usual seasonal increase) and logs.
"AgriHQ figures show lamb prices are around a quarter down on a year earlier. Beef prices are relatively better, but still around 10% lower than a year ago.
"These are not only some strong headwinds to growth, with flow on economic effects including to the fiscal accounts, but also disinflationary forces in and of themselves."
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44 Comments
Might be the best thing to happen to them with these ideologies ramping up around the world.....
One dairy farm converting or at least consented in opotiki, so maybe.
It's not a stupid idea - you can have both crops and small livestock beneath solar arrays. It's another useful income stream for farmers and there's evidence to suggest that the arrays have beneficial effects on the crops & animals below.
Maybe another part of the answer is to stop relying on raw products as our #1 export earner? Honestly, I feel like we are still stuck in 1973 and all the things I learned at university about "diversification" and "value-add" have just been ignored...
maybe we should not have converted so many farms to diary
https://www.ruraldelivery.net.nz/posts/Dairy-Farm-Conversion
New Zealand's 700th dairy conversion since 1995 took place in Southland recently , and theres now close to 650 dairy farms compared to 285 in 1997. Up to 100 sheep and beef farms are lining up to convert in the coming year.
I assume you’ve look at the economics of sheep farming at the moment sharetrader?
Lamb is already down $35 per head from last year, wool is in negative territory after expenses and beef is back $250 per head on last year. Cost inflation over the last 2 years on my farm is about 20%. Can’t see much profit this year.
Solar arrays can provide shade for the livestock, as well as fitting totem cattle brushes to the uprights if they're built strong enough.
The largest part of our manufacturing sector is ‘food and beverage processing’ so yes - lots of eggs in one (broadly defined) basket - unfortunately we haven’t managed to come up with any non-land/climate based competitive advantages of any decent scale (unless you count our incredible skill in attracting migrants to do jobs we don’t like) largely because we reject a whole bunch of things that made other countries richer (mining, oil, child labour, GMO, nuclear, heavily subsidised tech, tax haven status) - given that we barely tolerate agriculture these days - it seems we might be about to add that to the list - so we may be left with tourism and international begging 😁 - I mean leadership …..
Given our dire trajectory with regards to the education system - it’s hard to see a panacea bubbling up from that quarter and redefining NZ as we know it….
I understand we have quite a thriving ‘bunker’ economy for peeps waiting for Armageddon 🤔 maybe that could be our new thing ??
No problem. Labour and Greens will see to the excess farm conversions will be returned to natural bush.
Maybe the banks will become diary farm owners once these dairy farms start folding due to high interest rates, fertiliser costs, low milk prices and the ETS. They'll become available for carbon farming problem solved.
Lowering interest rates will prop up high value consumption imports and weaken the dollar. At the same time as exports weaken dramatically. Isn't that just a recipe for worsening our already terrible trade deficit - how does that end, currency collapse? Widespread capture of assets by overseas investors? What's the vision here?
Fonterra is one of the industries that was bringing 'new' money into NZ.
Farmers have been hit with higher compliance, on-farm, and labour costs.
Farmers do need to innovate.
Maybe they can plant pine trees and pollute the environment with slash and pine needles.
Our country is successfully destroying the hands that feed them.
Where does the money come from now to feed our woke economy.
Economics should not be woke.
Firstly it’s well recognised dairy farming is the largest polluting sector in NZ.
secondly farming hasn’t paid there fair share of operating costs ever - taking into account environmental damage
thirdly necessity will be the driver of innovation for them - evolve or die
I always holiday in town so the mokopuna can swim in the pristine urban waterways. Thank you big urban.
"Urban waterways have some of the most degraded water quality in New Zealand.
The Otago Fish and Game Council confirmed on social media on Sunday that hundreds of fish including smelt, flounder, bullies, trout and inanga had died and were littering the shoreline especially around the Brighton Road bridge."
https://www.newshub.co.nz/home/rural/2021/02/hundreds-of-dead-fish-foun…
Did you see how happy the NZ population was to use excess plastics and not recycle through COVID.
Suits you now to blame dairy and forget that you probably contribute too.
Agriculture DOES make up about half of the carbon emissions and it must come down and it will do that AT EVERYONE'S cost.
Meanwhile, woke NZ has to get working to figure out how to bring in new money.
NZ is racing fast to the bottom.
Of course, if things get worse fast, the NZD drops and milk gets cheaper for off-shore to buy so back on to the round-about we go.
Yes, look at how their number of births have fallen off a cliff, 18 million in 2016 to 10 in 2022:
https://www.statista.com/statistics/250650/number-of-births-in-china/
Its not so bad. So its a rubbish year...next year will be better. Still get to work outside. Fly around on the motorbike all day. Dogs for staff. Cute little calfies to watch arrive and grow. Dinky little lambs bouncing around the paddocks. Its inspiring watching nature at work. Bumble bees bumbling around in the grass. Ducks cruising past as they check out the dam. Wild piglets making you pissy rooting up a good paddock. The daycare group of wee feral kids sitting in a sunny spot on a rocky outcrop, waiting for their mums to return. The rabbit that huddles in the grass, thinking if he just doesnt move you wont see him. Everyday I am greatful I dont live in a concrete jungle.
Maybe you could have your own housecow instead Chris seeing you are so concerned with pricing. Get out there and milk her and it will be free. Its not a bad job. Sharemilk with her calf and you only have to milk her once a day. Unlike the farmers that are milking x2 per day 7 days a week. Its fulfilling. Take a beer crate to sit on and a bucket. If you have a good cow, she will stand there in the paddock while you snuggle up close to her to keep out of the weather. Nothing quite like a big ole cow to shade you from wind and rain while you ply away on her teats and fill the bucket. All the cheese and butter you require as well. Go for it Chris.
I never begrudge the price of dairy products. Working seven days a week is not for the faint hearted. Owner operators generally keep going every day of the year. Its a tough business. Also if customers understood the amount of milk that goes into making cheese and butter, perhaps they would value it better too.
(I loved my last housecow. Her name was Lofty, she was a big girl. I spent hours huddled beside her, she would just stand anywhere in the paddock while I milked her. The heat that lady chucked out, kept me warm in the meanest gale. Tears were shed when she died. What a gem)
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