The shifts might require significant downsizing of dairy herds, upskilling of staff and a resetting of costs to about $3.85 a kilogram of milksolids (MS) for farms to continue to operate successfully, Massey University dairy and business experts warned.
Most commentators have described dairy’s downturn as cyclical, with an upturn possible later this year.
But a Massey paper, Structural change in global dairy – the halcyon days of assured prices are no more, painted a dire picture for a sector now loaded with almost $40 billion of debt.
The paper was compiled by Massey’s dairy production Professor Danny Donaghy, its director of business and innovation Professor Hamish Gow and management school senior lecturer Dr James Lockhart.
They identified three periods that brought the sector to today’s situation.
The first was one of relative price stability until 2006. The United States and Europe were storing product when commodity prices fell and releasing it as they rose. The US also engaged in extensive dairy cow culling and land was assigned and retired for sustainability policies there and in Europe.
After 2006 surging Asian demand for dairy products depleted stores and demand surged ahead of global supply growth rates, with only a few exporting countries including New Zealand competing.
Lockhart said he and his colleagues had long been unconvinced by predictions dairy prices would continue to rise in real terms over the foreseeable future.
“I am not aware of any commodity that has done that in real terms, especially when the technology is transferrable from one country to the next, to countries with lower variable and fixed costs than ours.
“Why would any country in the world stand back and let a bunch of NZ farmers get wealthy at their expense?” he said.
That brought the global sector to a third phase, with the price now masking underlying structural changes to the supply of dairy products.
It brought an outcome the authors believed few economies would be immune from.
“Why would any country in the world stand back and let a bunch of NZ farmers get wealthy at their expense?”
James Lockhart
Massey University
The change came from supply-side shifts, with analysts pointing to a 2.7b litre increase in European milk volumes in the past year, dwarfing NZ’s total production of 2.1b litres a year.
The lifting of quotas meant farmers beyond traditional European dairy areas could now also use dairy technology previously unavailable.
“We have driven six hours through regions in Poland, dead flat, with soil as rich as what you find in Pukekohe, areas with farmers whose parents grew up under socialism and who now themselves have the opportunity to produce as much milk as they can and make some money – why would they not?”
Meantime, in the US low feed prices stimulated dairy production with feed costs falling by 40% since 2012 thanks to record grain harvests.
That was exacerbated by fracking technology making the US self-sufficient for oil, also helping keep corn prices low, because of lower biofuel values.
US production was only likely to continue upwards, thanks to the introduction of the Dairy Margin Protection programme in 2014.
It allowed farmers to insure against falling milk-to-feed price ratios, protecting their margins against any rise in feed costs or fall in milk values. It was expected only to add to the 7% of global milk supply sold internationally by the US.
Lockhart said he was working closely with farmers who had resisted the offer of extended finance by banks and instead were aiming to reset their entire farming system.
That involved wintering cows on, upskilling staff to better manage pasture and work on a longer-term average farm cost of $3.75-$3.80/kg MS.
It was in an environment where Fonterra’s ability to make a $4/kg MS payout was seriously in doubt, he said.
Moving back down the “marginal cost curve” on milk could also see cow numbers fall back to 1995-96 levels as the rest of the world increased cow numbers.
DairyNZ recorded 2.9 million cows that year.
