The latest GlobalDairyTrade auction result overnight was the second consecutive fall of more than 8% in three weeks.
After a small pause in the downward movement in early June, consecutive auctions produced three large negative results, leading to a painful slash of $1/kg milksolids in Fonterra’s forecast milk price from $7/kg to $6/kg.
But that may be still too optimistic should the $3000/tonne level persist for most of the current season.
The GDT index is now at 880, the lowest since a short period between April and August 2012 and before that between October 2008 and September 2009, during the Global Financial Crisis which followed a commodities price bust.
The 2008-09 dairy season ended with a milk price of less than $5/kg, a level at which most dairy farmers now would make losses.
Fonterra’s forecast revision to $6/kg on July 29 was a shock to farmers who were pre-occupied with calving and hadn’t realised the extent of the slump in world dairy prices since February.
The fall of 8.4% will now have everyone’s attention, including Treasury, the Reserve Bank, and the Finance Minister.
Whole milk powder (WMP), the biggest category by volume, fell in price by 11.5% to US2725/t, cheddar was down 10.2% to $3742/t, butter milk powder down 10.1% to $3852, butter down 9.6% to $2800, and skim milk powder down 6.5% to $3264.
WMP prices peaked at $5245/t in April last year and have fallen to nearly half that record level. The next GDP auction will be on August 19.
ANZ chief economist Cameron Bagrie described the depth of the fall as terrible.
“If this is sustained you are talking a payout closer to $5 than $6 and you are talking some pretty significant economic ramifications across all of New Zealand.”
Bagrie said China was not in the market to buy as it had been, there were issues in Russia, and demand from the Middle East had also softened.
“Roll that together and you get price action that’s terrible.”
That rural chequebook is going to close very quickly.”
The drop in milk prices shows NZ needs an economic upgrade to limit its overreliance on the dairy industry, Labour leader David Cunliffe said.
“Since February milk prices have collapsed by 41% which suggests the short-lived economic recovery may have already ended.
“Last night’s milk price fall of 8.4% follows Fonterra’s slashing of its forecast milk payout last week which is estimated to suck more than $4 billion out of the NZ economy.
“Given Goldman Sachs recently warned of a five-year global milk glut, the payout price could drop even further in coming months.
“If this trend continues we could see increasingly indebted farms being sold overseas under National’s lax overseas purchase rules.
“NZ is too reliant on one industry – riding the wave of commodity prices is not a long-term solution to grow jobs and incomes.
“NZ needs to protect and support its existing export base while diversifying our economy and growing dynamic industries such as ICT, wood processing and manufacturing.
Falling dairy prices highlight the danger of National’s economic strategy focusing on the export of a few, simple commodities, Green Party co-leader Dr Russel Norman says.
“National’s economic strategy has simplified our economy and concentrated our exports on a few low-value-added commodities.”
A growing reliance on one or two commodity exports had made the economy more vulnerable to commodity price swings.
“Producing increasing amounts of milk powder also has huge, downstream environmental impacts. We need to build a smart, green economy with much lower carbon emissions and water pollution.
“A smarter way forward is to invest in innovation and policies that support our manufacturing and ICT (information and communications technology) export sectors.
“National is not building a strong, resilient export sector,” he said.
