Saturday, March 30, 2024

Farmers produce less milk to make more money

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The recent dairy price downturn clearly illustrates the behaviour of commodity cycles and the powerful influence New Zealand dairy farmers have on milk powder prices, in particular, ASB senior rural economist Nathan Penny says.
Westpac senior agri economist Nathan Penny says some easing of the covid restrictions in China will contribute to demand for dairy products.
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The third “lesson from the dairy downturn” was that when farmers lost money, they changed their behaviour, he said.

The ASB economics team, which for most of 2016 was very bullish about a payout recovery, pinned its faith on the cyclical nature of commodity prices.

Although other commentators thought the abolition of European Union dairy quotas was a game-changer, ASB said that did not materially change the competitive position of the EU – that of a high-cost producer.

“We expected that low milk prices would eventually impact on the EU in the same way they were impacting in NZ.”

NZ’s influence as the world’s largest dairy exporter, especially the dominance in whole milk powder, showed up when reduced NZ supply had a big effect on global dairy prices.

“The other lesson we take from these points is that contrary to general belief, NZ farmers are not necessarily subject to the whims of global dairy markets.

“Indeed, NZ farmers have more pricing power than they are normally led to believe.

“In short, if NZ farmers produce the less, they will get paid more, with the net effect of higher incomes overall.”

Penny promised part two of his lessons from the downturn would point out ways the NZ dairy sector could adapt to, perhaps influence the global dairy cycle.

His third message for the time being was that low prices changed farmer behaviour and that price support and intervention only delayed the inevitable responses.

The abolition of EU dairy quotas in April 2015 did produce a surge in milk but European farmers found that was unsustainable and reacted as NZ farmers had done, with the result that seasonally-adjusted production fell throughout 2016.

ANZ Bank economists, who published a rural commentary before Christmas, said one of the biggest challenges facing the dairy industry over the next 18 months would be maintaining the extra cost efficiencies put in place during the downturn.

“There will be some natural unwind from extreme lows but there is a risk that if it is completely unwound profitability will remain elusive even with the lift in the milk price.

“There is a close relationship between the milk price and the costs of grazing, supplementary feed, cows, a range of services and fertiliser.

“Farmers will need to think carefully about ways to lock these and other costs in, that move with the milk price.”

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