A timely reminder from commodity markets

Last updated 05:00 20/07/2014

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The price of milk hit the TV news headlines last week after dairy commodity prices dropped 8.9 per cent at the fortnightly GlobalDairyTrade auction.

This was certainly a significant change, but not so much because of its effect on the price of milk in our supermarkets.

According to price figures collected by Statistics New Zealand, the typical price of 2 litres of milk was about $3.62 last month.

That's historically a high price. It was last around that level in 2011 and this time last year it was $3.17.

That's a price difference of 45c - not an amount that will make a significant impact for most of us.

Farmers, on the other hand, experienced a much bigger change as their milk price went from $5.84/kg of milk solids in 2013 to an estimated $8.65 this year.

As always with Fonterra, it's hard to convert those figures into costs per litre, but my estimates suggest the cost per litre of milk at the farmgate in the 2013 season was 51c, compared to 74c this season.

The retail, processing and distribution margin seems to have stayed the same at about $2.15 for a 2-litre bottle.

The impact on the farmgate price of the falling global commodity prices is hard to estimate, but if it was to drop to $6.25 a kg, say, it would be similar to the payout in 2010.

That year the typical retail price of milk was about $3.29 for 2 litres, so we can probably expect to save a few cents on our milk.

However, the collective effect on farmers is big. The 2014 season has been a bonanza for dairy farmers. Fonterra's estimate of the cost of its milk supplies this year is about $13.3 billion.

In 2013 the cost was about $8.5b and in 2012 it was about $9b.

In that context, the 2014 year must be seen as a blip, and although farmer incomes will probably fall a lot in the coming year, it will be like returning to more normal service.

While the decline in global dairy prices should remind us the commodity booms don't last, there are signs of more change to come.

The dairy boom encouraged huge investment worldwide in dairy processing facilities and much of that new capacity has yet to come on stream.

China, hit by soaring domestic demand and supply constrictions from foot and mouth disease, is learning to farm more efficiently, with New Zealand's help, and will gradually reduce its reliance on imports.

These factors mean dairying may not be the golden ticket to future riches in New Zealand. We should bear this in mind when considering how much to invest in infrastructure such as irrigation to convert previously unsuitable land to dairy.

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And investment should include the environmental cost.

- Sunday Star Times


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