Saturday 27 February 2016

Tough times fpr John Key's rockstar economy

More on John Key's rockstar economy
Dairy industry's woes a long way from over says New York-based analyst

Grass-fed cows give New Zealand a competitive advantage, farmers have been told.

26 February, 2016

A series of "tectonic shifts" in the global dairy market are going to keep New Zealand export prices down for some time, a New York-based expert has told industry leaders. 

Speaking to a Federated Farmers dairy and sharemilkers' council meeting in Nelson, Rabobank's  dairy analyst, Thomas Bailey, who previously had four years with Fonterra, said there had been five big changes.

A huge increase in European milk production had caught New Zealand off guard, he said. 

The extra nine million tonnes over the last 24 months was like New Zealand production growing 50 per cent.  The Dutch were producing so much milk "they're probably going to have to start dumping it". 

"We're completely over-supplied, which is why prices are so low, and why we're pinned down at $1800 a tonne for milk powder."

Second, New Zealand, with 30 per cent of the global dairy export trade, had suffered large market losses in its "big-demand markets", China and Russia. 

"China is down 16 per cent on 2014 in terms of import growth, Russia is pretty much permanently out of the race at this point."

Third, the prices of oil and dairy exports were closely related, with many big oil producers being large importers.  If oil prices stayed down the market could be depressed for years. 

Fourth, while historically when New Zealand dairy production went down, global prices rose. This year prices didn't respond like that. 

"They [buyers] know they can just go to Europe. So New Zealand appears to have temporarily lost its advantage in terms of influence on prices," Bailey said.

Last, a US renaissance in dairy was centred on fresh products that New Zealand wasn't supplying.

"It's a temporary shift in the dairy market, we'll get back up there - but when you're at the bottom that's when you've got to think about where you want to be when you're at the top."

There were opportunities to export value-added products, with New Zealand's pasture-based production giving a competitive advantage over US producers.

"If you go to a cafe in New York city, people want grass-fed milk, grass-fed yoghurt. They're prepared to pay three times the price for it - and it's hard to get."

Bailey said dairy producers would continue to see reduced prices, with probably a low start to 2016-17.

"This recovery is ... going to take a while.  We're at the bottom, it's got a long way to go and you need to think about value-added."

New Zealand special agriculture trade envoy Mike Petersen, a Waipukurau farmer, said it was "pretty tough times for dairy".

The huge bulge in international production had been predicted for two years, he said. 

"We are going to see this huge volatility carry on.

"It's not just dairy, we are seeing all of our sectors facing volatile times. 
Horticulture, pipfruit, are in boom times, but when I talk to them I says 'guys, the high-price times are the times to be worried'."

It was when milk solids fetched over $8 a kilogram that "expectations get ahead of themselves".

"Land prices, cow prices ... confidence starts to undermine future earnings in my view, and this is potentially happening in some horticulture sectors as well." 

Petersen said cross-border traders like New Zealand got hit first and hardest when prices fell.

"When you travel the world and look at what's happening in domestic markets, dairy prices haven't changed. Most farmers are still getting pretty good money." 

He said social media and the ability to connect with consumers was "absolutely our biggest opportunity, but also absolutely our biggest threat".

It meant farmers had a responsibility to be "squeaky clean in everything we do". 

 KPMG head of agribusiness Ian Proudfoot said New Zealand could produce enough dairy products to feed 40 million people but to do well the industry should instead aim to provide 5 per cent of the diet of 800 million people who were buying for events and special celebrations.

 Such customers would only use New Zealand products occasionally, but be prepared to pay a big premium, Proudfoot said. 

Going back to 2014

New Zealand will be the "rock star" economy of 2014, says a leading global bank.

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