The tanking NZ dairy industry

Dairy farmers could be headed for crash landing

Low milk prices 'wiping farmers out'

It is a real possibility that 25 percent of dairy farms could fail if the milk price doesn't rise soon, an agriculture consultant says.

Photo: 123RF

Radio NZ,
14 March, 2016

Prime Minister John Key is being accused of downplaying the possible impact of the crisis in the dairy industry, which saw a price forecast below the $4 mark per kilogram last week.

Labour says 25 percent of farmers could face losing their farms, but Mr Key said he was told it would be closer to 5 to 10 percent.

Agriculture consultant Peter Fraser said it depended "which trip-wires we fall over".

"We're not in a world of a soft-landing, we missed that opportunity four or five years ago. We're not looking at a hard landing ... we missed that a number of years ago as well.

"We are looking at a crash landing and the issue is how many passengers will get out.

"If milk prices bounce back to $10 or $8 or something like that then we will have no problem at all, but if I'm right and they stay around the $5, plus or minus $1, then it means ... they cannot get their prices down, they will go out of dairy."

The problem was largely caused by farmers letting cost structures get out of control, he told Checkpoint with John Campbell.

"Now milk prices are low and it's wiping us out."

PM downplaying dairy crisis - Labour

Mr Key refused to be drawn on the crisis, but said some people were saying up to 10 percent of dairy farms could fail.

Labour's finance spokesperson Grant Robertson said if the worst case scenario outlined by the Reserve Bank played out, that figure could be closer to 25 percent.

"That's predicated on pay-outs for three years of $4 or under, we're two years into that already and I think the prime minister, once again, is probably downplaying the extent of the crisis in the dairy sector," he said.

Labour finance spokesperson Grant Robertson Photo: RNZ / Alexander Robertson

Mr Key told Morning Report today he had been told five to 10 percent of farmers could lose their farms.

There were a few situations where farmers were over-leveraged, but most would make it through, he said.

Prime Minister John Key Photo: RNZ / Alexander Robertson

Listen to Prime Minister John Key on Morning Report

3 min 15 sec

Mr Robertson said it was hard to predict what would happen because there were so many variables.

"But what we do know is that there is a five-year glut in the global dairy market, for wholemilk powder particularly, which is New Zealand's main export, that presents a real risk.

"We're now looking at two years of payouts around the $4 mark, another one [year] would see potentially a quarter of farmers in trouble.

"I think the prime minister's spent a long time trying to avoid the fact that the dairy industry as we know it is struggling."

It was time for the government to get around the table with Fonterra, the banks and the farmers, to plot a course forward, he said.

But Mr Key said the banks and Fonterra were already working closely with farmers.

"I think that's a much more sensible approach than government sitting around the table in Wellington," he said.

Greens Party co-leader James Shaw said the Reserve Bank had put potential farm failures at 44 percent if the worst-case scenario played out.

"In these situations, it's always good to prepare for the worst case scenario and to ensure that you're planning this out in terms of what we need to do to transition though this period."

Mr Shaw said farmers should be supported by the government but not through direct financial assistance.

"We think for example that the $1.6 million that they allocated to irrigation on Thursday would have been better spent going to the Rural Support Trust to help farmers and their families and suppliers through the tough transition that many have been going through.

"I don't believe that a direct cash bail-out is a good idea, I think that introduces moral hazard and by definition it means you're supporting the most high cost, least efficient models."

According to Dairy New Zealand, there are just under 12,000 dairy farmers in New Zealand.