Dairy farmers across New Zealand are cautious about difficult times continuing following recent results on world auctions.
Tuesday’s latest global dairy trade result saw a further 3.5 per cent drop in the price index, bringing it to a five and half year low.
This should be cause for concern, according to milk market economists at Dairy New Zealand, who are calling on farmers to tighten belts.
As part of the levy board’s initiative Tactics for Tight Times, analysts Matthew Newman and Zach Mounsey say that, if next year’s payout is below NZ$6 per kilo of milk solids, major decisions will have to be taken.
Tumbling dairy prices have led farmers to dry off earlier, milk once a day and cull early to ease costs. However, if prices remain depressed, ‘core operating expenditure’ will need cutting in 2015/16 to avoid debt escalation.
“This will require difficult on-farm management decisions,” they warned.
“Farmers who are proactive rather than reactive will be better equipped to approach the volatile fluctuations in milk price.”
Managing cash flow into 2015/16 will be key as retrospective payments are slated at a third of the previous season.
High retrospective payments from the 2013/14 season have made cashflow ‘manageable’ recently, but this lifebouy is set to reduce to below 50 cents from $1.50.
Among bearish factors are Russia’s import ban, the potential for European output to react to quota abolition and unrelenting US supply, barring drought-weary California.
Of the European countries, New Zealanders have been told that Ireland, Denmark, France, Germany and the Netherlands all target higher production by 2020.
Oil prices were also flagged, with a reference to a Forbes analyst who rejected a higher oil price this year.
One major unknown continues to be Chinese demand, although the Dairy New Zealand article said milk powder stocks should have worked through.
Some reports are in agreement, saying China has returned to the market. This follows faltering domestic production as cows numbers drop under the low price of milk.
“Reduced cow numbers and lower milk prices will constrain milk production in China over the next couple of years, creating a larger supply gap and adding to the requirement for imported powder,” said the DairyNZ analysts.
Source – The Cattle Site