Business Farming

Tuesday 27 September 2016

Economic view: A quarter of Kiwi dairy farmers could go under

Alan Renwick

Published 20/04/2016 | 02:30

Alan Renwick
Alan Renwick

It is not surprising in a country where dairy products account for around a quarter of export earnings, the sector is rarely out of the news.

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Recently this coverage has been dominated by the fall in the predicted payout from Fonterra to just NZ$3.90 (€2.40) per kilo of milk solids (excluding dividend) - which can be compared with a high of NZ$8.40 (€5.15) two years ago and an often cited average cost of production of around NZ$5.20 (€3.20).

As Irish producers are all too aware, the period of low prices has been more persistent and prolonged than envisaged by almost all industry observers.

Within New Zealand, the low milk price has placed considerable pressure on the sector. However it is dairy farmers, as usual, at the sharp end of this and some estimates suggest up to 25pc of producers could go under if the low prices persist.

It is fair to say that the response of the government has been to generally try and play down the seriousness of the problem. It argues the industry is 'resilient' and that it is more like 5pc to 10pc of farms that are at risk of failure.

Of course, without a complete ideological change, they are limited in the actions that they can take. Unlike in Europe they do not have support payments which can either be increased or brought forward nor mechanisms to buy up excess supply.

There have been muted calls for some form of support scheme to help farms temporarily through this, but they are few and far between.

Earlier in the season Fonterra implemented an interest free loan scheme for producers and recently stated it will pay out the dividend to producers early to help them through winter.

This has been possible largely because the collapse in input prices has led to a significant increase in profitability for Fonterra - profits have more than doubled in the last year. It has come under criticism though for not foreseeing just how long period of depressed prices would last; for not having better mechanisms to deal with them and; becoming complacent after an extended period of high prices.

In part the criticism also links to longer held concerns that it has exposed New Zealand dairy too much to the vagaries of commodity markets by not developing higher value products. However, others are recognising that Fonterra is making strides in this direction as its latest figures highlighting a significant increase in revenue from higher value markets.

The banks are under severe pressure to support farmers through this period of low prices. Key members of the main farmers union have increased this pressure by stating that banks have worsened the situation by irresponsible lending.

Publicly at least there has been relatively little discussion of irresponsible borrowing by producers.

The vast pivot irrigation systems operating right across the Canterbury plain in the South Island is a visual testament to the scale of this borrowing. Sometimes to an outside observer it seems that the banks are being asked to perform some of the functions we in Europe expect from government, like continuing to support farms for wider social reasons.

The banks, though, are in a tricky position of having to balance their own self-interest of maintaining confidence in the sector with a recognition that support cannot be open ended.

Another development of relevance to Ireland, has been the granting of permission for an options market for dairy futures available on a per kilo basis denominated in NZ$.

Making it possible to buy options in small quantities aims to extend the accessibility of futures markets as a risk management tool beyond the big players in the sector to the average farmer.

Alan Renwick is Professor of Agricultural Economics, Lincoln University, NZ

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