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China's milk stockpile leaves New Zealand dairy farmers struggling

Tuesday, March 29, 2016 - 07:33

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China once helped drive global dairy demand but its stockpiling of powdered milk sent prices plunging and has left farmers in the world's top milk exporter, New Zealand, struggling to stay afloat and its agriculture-dependent economy facing risks.

[WELLINGTON] China once helped drive global dairy demand but its stockpiling of powdered milk sent prices plunging and has left farmers in the world's top milk exporter, New Zealand, struggling to stay afloat and its agriculture-dependent economy facing risks.

New Zealand's dairy sector was until recently the backbone of the economy, representing around 25 per cent of exports, but in the past two years farmers have had NZ$7 billion (S$6.49 billion) wiped off their collective revenue.

Today, around 85 per cent of farms run at a loss, leaving them fighting to stave off bankruptcy and forced farm sales.

Farmers' struggles pose a risk to economic growth, and banks exposed to the sector, but alongside the financial cost some fear a growing human toll: suicides as a result of the stress. "We have accepted the fact that we are going to have financial casualties, what we don't want are actual casualties,"said Andrew Hoggard, dairy industry chairman for lobby group Federated Farmers.

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Michelle Thompson, chief executive of the Rural Health Alliance, said New Zealand's rural suicide rate has been 20-50 per cent higher than the urban rate in the past 10 years.

A recent survey by Federated Farmers shows 11.1 per cent of its dairy farmer members are experiencing pressure from banks over mortgages, compared with 6.6 per cent six months ago. Around 3 per cent of farms are at "extreme risk" of going under.

Dairy farmer Louise Giltrap says she has to think twice before starting her tractor as it costs her money. "It's right down to the nitty-gitty and you can't do anything unless it's going to have a payoff," said Giltrap, who runs 200 cows near Kerikeri, on New Zealand's North Island.

Debt in the sector has nearly tripled over the past decade and jumped 10 per cent in the year to June 2015.

The dairy sector's woes have hit the wider economy, with the central bank forecasting growth of around 2.3 per cent in the year to March 2016, down from 3.6 per cent a year earlier.

Weak dairy prices will have a "significant negative impact on the wider economy," said BNZ Head of Research Stephen Toplis.

The Reserve Bank of New Zealand warned this month that stress tests showed banks would report losses ranging between 3 per cent and 8 per cent of their dairy exposure, depending on the severity of the price plunge.

Banks have lent about NZ$38 billion to farmers, 10 per cent of total lending in New Zealand. The five banks that were the subject of the stress tests represent nearly all the lending to the sector.

CHINA MILK DEMAND KEY

Since early 2014, dairy prices have fallen around 60 per cent, in large part linked to weaker demand from China after it stockpiled milk powder, and with most analysts tipping milk prices to stay low for longer.

"In China itself, inventories are about the same as last year," said David Mahon, managing director of Beijing-based Mahon China Investment Management, who estimated current stocks at around 300,000 tonnes. "It's going to be a very difficult year for Western farmers, Australasia particularly. Farms will close, there will be a lot of stress."

New Zealand's Fonterra Cooperative Ltd, the world's largest dairy exporter, is also downbeat and recently cut its forecast payout for its 10,500 farmer-shareholders to a nine-year low.

Ironically, Fonterra, which counts 90 per cent of farmers as shareholder producers, last week reported a 123 per cent rise in annual profit, helped by products like mozzarella and ice cream. Fonterra buys the raw milk for those products, making a profit on the margin.

In recognition of the hardships faced by farmers, Fonterra brought forward a dividend, taking the payout to NZ$4.30 - still well below the break-even point of NZ$5.25 for many farmers.

The Real Estate Institute of New Zealand says overall farm sales in February rose to 115, up 15 per cent from a year ago.

And land prices are falling, putting further pressure on those thinking about abandoning the land. The median sales price per hectare for dairy farms fell 19 per cent in the three months ended February 2016, says the institute.

Government officials have ruled out any bailouts, but Minister of Primary Industries Nathan Guy said banks have indicated they will support farmers.

However, Mr Guy warned: "It is inevitable that some farming businesses will be unable to sustain these prices." For farmers like Ms Giltrap, there is only one solution. "It's not a question if prices are going to improve; it's a question of when. You just have to play a waiting game. You can't actually make any plans," Ms Giltrap said.

REUTERS

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