Despite the turmoil inflicted on global markets, NZ’s dairy industry turned in a phenomenal performance for the 2019-20 season, with export earnings $709m ahead of the previous year.
And though the global market is finely balanced at present, the prospect is that the industry could again be ahead of the pack in the current season.
Dairy farmers deserve the plaudits of the rest of the country, even though the present government has gone out of its way to clobber the industry with tough freshwater regulations designed to satisfy “dirty dairying” critics, despite the most polluted water often being found in city and town waterways and harbours.
With the loss of foreign exchange from the collapse of the international tourism and education, the NZ economy is more than ever dependent on the primary sector to increase output for sales abroad.
Now, as dairy farmers settle into the new season, those who supply Fonterra will be looking to the big co-op reporting its annual result on September 18, with confirmation of its final farmgate milk price for the 2019-20 season. This is expected to be $7.15kg/MS.
For the current season, Fonterra has indicated it is maintaining the previous forecast range of $5.90 – $6.90 kg/MS with the advance rate set off the mid-point of $6.40kg/MS.
In a recent report ANZ economists said global dairy markets are in a much stronger position than they earlier expected. Sales of the production using the milk that will be delivered by farmers in the 2020-21 season are really just getting under way. Until this product is actually sold there remain massive risks that the milk price could swing away from current forecasts.
“The good news is that the market is currently in a much stronger position than it was a few months back and this bodes well for those negotiating forward contracts”.
Other authorities have also pointed to positive signs for the NZ dairy export trade. The ability to trade dairy commodities has been helped because of the flexibility in product mix and country placement.
Population growth and growing per capita incomes internationally are driving increased consumption of dairy products. Production of fresh milk is expected to grow by over 2% a year until 2028. The Chinese market – NZ’s most important customer – is still growing,.
Fonterra’s September 18 announcement will be keenly studied not only by farmer-shareholders but also more generally for signals that the big co-op has recovered its own good financial health, after the losses it registered in the previous two seasons.
It reported a $500m profit in the first six months, and farmer-shareholders will be looking for a similar upswing in the second half, as the reformed strategy being implemented by chief executive Miles Hurrell takes full effect.
Fonterra meanwhile has cautioned farmers to be careful with on-farm financial decisions. That’s not surprising given the uncertain international outlook, with economists warning of a global slowdown.
Yet when dairying has become such a vital component in maintaining the country’s living standards somewhere near where they were before Covid-19 struck, Point of Order contends it is in the national interest for all those involved, from the government down, to be promoting innovation in the industry, from robotic milking machines to gene editing, in order to increase efficiency, lower costs and increase production.
The top echelon of NZ’s dairy farmers are highly efficient, with many in that group averaging less than $4kg/MS in the cost of production.
But the problem is that rural confidence has been severely dented by such government regulatory measures, as with its freshwater rules and the Zero Carbon legislation.The freshwater regulations are said to have the aim of preventing further: “loss and degradation of freshwater habitats and introducing controls on some high risk activities”.
The industry claims this could cost NZ “$6 billion per annum in GDP losses by 2050”.
Against that blow to rural confidence, farmers can take heart from the evidence that their industry is well placed to take advantage of the expanding Chinese market for dairy products.
A study by NZIER indicates Chinese consumption per capita is still small relative to other parts of Asia and the world (roughly one-third of world averages). Despite this the growth has been dramatic – per capita consumption has doubled in 10 years.
It says the UK exiting the EU is also likely to change dairy markets since it is the second largest dairy importer after China. While there is uncertainty how NZ producers will take advantage of this market any increase in international demand will have a positive impact on world prices.
How NZ might gain will become clearer as the FTA with the UK takes shape.
“For these reasons – particularly growing per capita consumption and population growth – it is likely that demand will be strong for dairy products over the next ten years”.
The NZIER study concludes the Covid-19 and post-Covid-19 periods look bright for the dairy industry in NZ.
“Demand is still growing and the ability to deliver consistently high-quality products from a trusted source (with transparent regulatory oversight) means that real prices might not increase dramatically, but they are unlikely to decline over the next ten years….The challenges for NZ dairying are on the supply side”.
NZ can exploit its advantage with low cost wholemilk powder against its subsidised European and US competitors, who rely heavily on consumption of butterfat products. Demand for cheese and butter is falling internationally because the Covid-19 pandemic has virtually shut down the hospitality business globally.
So it shouldn’t be just the co-op’s farmer-shareholders cheering if Miles Hurrell can show on September 18 he has got Fonterra’s strategy right, but the rest of the country as well.