GlobalDairyTrade auction prices suffer massive fall
Dairy prices have fallen for the ninth consecutive time, bringing the GlobalDairyTrade price index to its lowest point in history.
Dairy prices plunged a disastrous 10.7 per cent at the latest GlobalDairyTrade (GDT) auction on Wednesday - the largest drop since April 2015 - and this saw the price index fall to its lowest point since the GDT was first established in 2008.
The GDT price index is calculated from the total quantity sold in a trading event across all products, contract periods and sellers.
Despite months of price drops, the price of milk in supermarkets is not expected to fall until later in the year.
New Zealand Institute of Economic Research senior economist Christina Leung said effects of the disappointing auction results do not tend to have a direct immediate effect on milk prices for consumers.
"Any effects tend to be quite lagged. We might see it later this year but it's hard to tell. There are many things that go into milk prices at retail level, including rent and margins," she said.
Dairy farmers are already earning less than they needed to operate, says Wairarapa farmer Chris Engel.
"If you need $6 to operate and you're getting $4 - and they are talking of less - there's a big gap and you can only reduce your expenses so far," Engel said.
The flow-through effects of nine consecutive falls at the GDT auctions appeared to be starting to flow through to the supermarket shelves, with figures from Statistics New Zealand showing the price of fresh milk was down 2.6 per cent in June.
Statistics New Zealand's Matt Haigh said on Monday the price of fresh milk was the lowest since August 2013, when 2 litres of blue-top cost $3.17.
"The average price for 2 litres of blue-top milk was $3.36 in June, down 9.4 per cent from its peak in November 2014."
Countdown spokesman James Walker said the supermarket's prices for its 2 litre of homebrand milk had recently ben cut to $3.19 from $3.39.
"Milk prices are coming down it just takes time for them to filter to the retail price," Walker said.
The supermarket bought milk on long term supply contracts which limits the ability to reduce prices quickly, he said.
"We negotiate to try to bring them down when we can," he said.
The average sale price at the latest GDT auction was just US$2082 (NZ$3156) a tonne, but much of the product sold below this price.
Cheddar and whole milk powder suffered the most, falling 13.9 per cent and 13.1 per cent respectively.
Skim milk powder fell 10.1 per cent and anhydrous milk fat fell 10.6 per cent.
AgriHQ dairy analyst Susan Kilsby said the dive in prices suggested market participants were taking a much dimmer view towards a price recovery.
"Farmers now face two consecutive seasons of extremely low milk prices. The majority of farmers can't break even at such a low milk price," she said.
"A $1 per kilogram of milk solids drop in the milk price equates to approximately $2 billion less income for dairy farmers.
"Farm debt levels will rise. Rural communities will suffer as farmers reduce spending to the bare essentials."
Many of the products offered by Fonterra sold at their opening prices, which the company usually sets at 15 per cent below the previous auction price.
Kilsby said the NZX Futures market anticipated whole milk powder prices would fall but the market underestimated the extent of that fall.
ASB chief economist Nick Tuffley said it was a weak result, with products that made up New Zealand's main exports suffering sizeable falls.
After the last auction results, which saw the GDT index fall 5.9 per cent, Tuffley said ASB came to the view that the longer-term recovery for dairy prices would take a lot longer.
"Dairy prices are unsustainably low, well below the global cost of production," he said.
"We've seen really strong global supply, including in New Zealand, but also the demand is taking a bit more time to recover."
He said it was looking increasingly likely Fonterra will revise down its $5.25 payout for this season but expected next season's payout to be stronger.
More generally, there have been weaker commodity prices recently and a key uncertainty in the short term was both of the latest GDT auctions have taken place when the Chinese equity market has been under pressure.
"It is always possible there's some recovery down the track. We're just seeing a short term dip on commodities on concerns over the Chinese sharemarket," Tuffley said.
Fonterra group director of co-operative affairs Miles Hurrell said in a statement the milk price will be considered by the board at its next meeting on August 7.
"The global dairy market currently has a big imbalance between demand and supply. This is a global issue, not just a Fonterra one," he said.
"There is a lack of demand globally, particularly from China and Russia, and a huge surplus of supply from New Zealand, Australia, the European Union and the United States."
Labour finance spokesperson Grant Robertson said auction results was further evidence of the "complacency of the National Government on the economy and New Zealand jobs and incomes".
"The economic signals have been clear for months now, yet the complacency of the Government has put jobs, incomes and the viability of productive New Zealand businesses at risk," he said.
"Just a few weeks ago the Reserve Bank Governor warned of the risk that dropping dairy prices represents to our economy.
"The expanding $13 billion economic black hole from this price collapse will cause significant economic damage to regions that are heavily reliant on dairy and the wider economy unless the government acts swiftly."
Green Party primary industries spokesperson Eugenie Sage said the plummeting dairy prices show the need to invest in value, not volume, through more research and development.
"Just doing more of the same - expanding stock numbers and raw commodity exports - leaves the rural economy open to the risks of continuing low global dairy prices," she said.
As a result of the poor auction results, the New Zealand dollar fell against both the Australian and United States currencies.
It dropped from US67.12c and A90.09c on Wednesday evening to US65.97c and A89.39c on Thursday morning.