Dairy price slump to hit hard
The Waikato is set to take a third of a billion dollar "hiding" from a sharp drop in world dairy prices.
The hit is expected to ripple through the economy from farmers to their suppliers and onward to shops and other businesses.
But it could also have a bittersweet spinoff for homeowners, with the economic wallop possibly big enough to put a hold on pending interest rate rises.
After the fall in Fonterra's overnight auction on Tuesday, global dairy prices are down by a third since January.
The plunge comes on the hooves of new DairyNZ statistics that revealed the dairy industry's $3.8 billion contribution to the local economy, based on last season's record high milk prices.
But following news of the drop, bank economists cut their milk price forecasts for the 2014-15 season to $6-$6.25/kg milk solids.
A $1 drop would bring the milk price down to $6 and would mean a $378.5 million hit to the Waikato economy, based on last season's production figures, according to DairyNZ statistics for the 2012-13 season.
For the average Waikato farmer with a 337-cow herd producing 330kg of milk solids per cow, the drop would mean a $111,210 drop in the price paid for their milk.
Ohinewai dairy farmer Mike Waugh said the drop was quite scary with potential major repercussions for everyone.
"Everyone will get a hiding out of this. The farmers will get hit directly then the suppliers and contractors. Everyone depends on dairy in this area."
Waugh said the price drop couldn't have come at a worse time, with farmers coming into the dairy session and facing debt accumulated from the drought.
"We don't need this. We just had two of the worst years in a row, we don't need a third. The drought is the one that affected us the most."
The Reserve Bank was expected to increase the official cash rate (OCR) next week to 3.5 per cent, meaning home owners would pay more to the banks in interest.
But Westpac senior economist Anne Boniface said: "After today's data double-whammy, we think markets should pause for thought.
"A July OCR-hike may not be quite such a sure thing as previously thought."
Waikato Federated Farmers president Chris Lewis said most farmers would have accounted for an expected fall in milk price in their budgets for the new season.
"For myself, my farm working expenses won't change so much. What will change is where we will spend that capital spending.
"Farmers now will wait for guidance from Fonterra in the next month or two where they will see a payout drop of 50 cents or more after all of these other drops."
The extent of the fall surprised Lewis.
"Most farmers would had thought it had bottomed out by now, but this is a significant indicator for farmers to tighten their belts and do the basics well for the new season.
"You can have four crap seasons and one good year and it will be followed by four more crap years of payments. Then you have to contend with bad weather and droughts. It shows that farmers have to be tough to survive this industry."
For farmers, it may mean putting any plans to hire new staff on hold.
South Waikato farmer Mark Foster said farmers would now be looking at a payout closer to $6, but he was not worried.
"It'll come right, probably somewhere around $7. I'm not worried, cow prices are steady and everyone is happy."
Te Awamutu farmer Wayne Vernall was picking a bounce.
"There'll be a rise by the end of the year."
Westpac senior economist Anne Boniface said weaker demand from China and strong production from the northern hemisphere were key reasons for the price softening globally.
What the region thinks of the big dairy price drop
Cambridge farmer Willie Matthews said while news of falling dairy prices ''does make you think about inputs on farm'', all was not lost.''No, we are not panicking, it is no great surprise. I think there is even a sense among farmers that it is going to get better,'' he said.Matthews - who milks 230 cows on a 70ha farm - said last season was his best ever, producing 121,000kg of milksolids.''It's actually better to know now, rather than at the end of the season I think.''When we found out about the drop in payout at the end of last season, that was hard because it actually equated to about $25,000 of lost income.'' Waipa's deputy Mayor Grahame Webber, who also runs a 720 cow farm at Taupo, said despite the drop there were still lots of positives.''It's not panic buttons yet, there's a long way to go in the season.''Webber, who is also Waipa District Council's rural Maungatautari ward representative on the Cambridge Community Board, said many farmers had planned sensibly given the financial climate they are faced with.''We have been warned for the last few years that prices would be volatile, so many farmers have made plans allowing for that volatility.''
With dairy farming contributing over 70 per cent of the Hauraki district's GDP, Mayor John Tregidga said if the trend of dropping dairy prices continued the effect would be significant.But he said farmers' spending habits had changed.''Things have changed in the last 10 years and farmers are more business-minded when it comes to spending. You don't see the big blow outs that used to come with a high payout, farmers are more cautious these days,'' he said.''The feedback I get from talking to farmers in the area is that the situation will correct itself in due course,'' he said.He said the Northern Hemisphere was in its high production season while New Zealand is in its low season.''While not minimising the situation, once the seasons change and production ramps up we should see a difference in the dairy price,'' he said.Hauraki Plains dairy farmer and P3Trust chair William Tye said there was no real surprise that prices were dropping.''We are approaching a downward spiral and prices go up and down over the year, although we seem to have had more downs than ups lately,'' he said.
South Waikato District Council mayor Neil Sinclair was unconcerned with the news.''Milk prices fluctuate, that is the nature of this industry.''He said most important was that Waikato dairy farmers were rated the top performers in the country.''Our dairy industry continues to be a strong economic driver for the region and for our district.''This points to collective excellence in management practices in the dairying industry. The impact of the dairy industry on our community remains positive and the sector strong.''Putaruru Tractor Services CEO Steve Rowe seemed to shrug off the price slump too.He called it a ''small blip in the radar'' for his business that has survived the past 23 years.He said PTS has just come off two ''phenomenal'' months but in no way did he bank on that continuing.''It comes down to how people's businesses are geared to handle these things.''During the past two decades in agriculture he said ''life lessons'' have taught him to prepare for the worst.''When you have been in business for as long as I have you know there could be three to four months where farmers don't spend so you learn to always keep things in reserves.''But he knows this latest price drop could damage unprepared businesses.''It can really hurt people if they rely on constant business, that's when they start to rely on overdrafts.''He said after coming out of a recession four to five years ago the overall outlook is ''really, really positive''.
Te Aroha Federated Farmers chairman Andrew McGiven said suppliers need to "ride the rollercoaster" of changing returns from Global Dairy Trade auctions and exchange rates.Overseas markets are still using current stocks of New Zealand dairy products, which means they are not purchasing at present, he said. "Our big customers need to buy again."However, McGiven said these economic indicators are beyond the control of Fonterra suppliers."Farmers can't do anything."He suggested the Fonterra payout will be "locked in" for this season, with the auction and exchange rate affecting next year's returns."We've got a long way to go and no-one should get too carried away with what's happening now," said McGiven. He said farmers will generally be concentrating on calving at this time of the year.Matamata-Piako District mayor Jan Barnes said local farmers would adopt a steady as she goes mentality.''Farmers know the market is volatile and are very prudent and astute,'' she said.She was not concerned that the decline would have an impact on the local economy.''We know that when dairy farmers are doing well the community does well and and as a community we do watch what is happening with the markets' fluctuations, but we are resilient,'' she said.
Farmer and Federated Farmers Matamata president Stew Wadey was not surprised by the Global Dairy Trade (GDT) decline of 8.9 per cent.''Bank economists have been indicating a low dairy price for the 2014/1015 season,'' he said.He said the 8.9 per cent drop did not cause ''panic stations'' for him.He would only be concerned if the GDT dropped by 15 per cent.The thought that the world would always need New Zealand's dairy products kept him confident.Wadey said the drop reflected that the world was now paying a more realistic price for dairy products after New Zealand Fonterra farmers had enjoyed historically high advanced milk prices.He did not think the current decline would affect local farmer's spending habits immediately or over the next two weeks.He said most farmers used the GDT, which tracked the fortnightly auction of global dairy commodities, as a tool to prudently manage their finances. Wadey said the market had always been volatile and had its ups and downs, it was just now everyone had access to that information regarding the market's fluctuations.
Patumahoe farmer and Auckland provincial president of Federated Farmers Wendy Clark said they would need to keep a close eye on their budget.''[The dairy price drop] is worrying because it affects our payout and although we do budget conservatively... it is concerning,'' she said.Karaka dairy farmer Murray Shaw agreed the continued drops in dairy prices were getting a ''little bit worrying''.The lower dairy prices have already changed his budgeting plans.''There will not be any capital spending now, it will just be the normal running expenses.''Paparata Valley dairy farmer Simon Cotter said the price drops will affect his budget ''big time''.''It puts more of a strain on us dairy farmers to try and keep prices and expenditure down.''