Falling demand for dairy products, increasing wheat stocks, Russian ban on food imports have created the worst possible “Perfect Storm” for dairy farmers worldwide.
Dairy farmers’ business resilience will be severely tested,
especially over the next few years until these extraordinary events are resolved or
resume normal trading.
I think we are likely to experience low milk prices for several years. This is not a short term cycle....more likely to be a period of major re-adjustment as supply & demand are completely out of whack!
Farmers need to quickly get control of their cash-flows, debt servicing and capital spending needs to ‘out of cash surplus’ only.
I think we are likely to experience low milk prices for several years. This is not a short term cycle....more likely to be a period of major re-adjustment as supply & demand are completely out of whack!
Farmers need to quickly get control of their cash-flows, debt servicing and capital spending needs to ‘out of cash surplus’ only.
New Zealand dairy farmers have been ‘farming the milk price’…some
have made decisions based on “an apparently ever increasing milk price”. This
is a very risky strategy especially when there is a very volatile market for
dairy products and a rapidly increasing stockpile of world grain surpluses.
Debt levels have increased dramatically in the past 12 months. One might have
expected debt to be repaid during periods of high milk prices but no….debt has actually
increased! The milk price has increased but so too has the volatility and
uncertainty.
In my last blog I made reference to John Mulvaney (Australian Dairy Consultant) saying that too many dairy farm businesses are already ‘propped up by the milk price’. On-farm spending trends with increasing milk prices. The issue now is can farmers screw back down on-farm spending with a milk price that has crashed?
In my last blog I made reference to John Mulvaney (Australian Dairy Consultant) saying that too many dairy farm businesses are already ‘propped up by the milk price’. On-farm spending trends with increasing milk prices. The issue now is can farmers screw back down on-farm spending with a milk price that has crashed?
Another recent feature of the NZ dairy industry is “Farm
System creep” that is an across the board move to higher input systems with
more imported feed, machinery and complicated systems. As this move occurs to
higher input systems, businesses get more exposed to world market’ volatility,
have smaller profit margins and more operating costs become “sticky” and much
harder to reduce. NZ dairy farms have lost much of their low cost
competitiveness and the competitive advantage of low input pasture based
systems.
Efficient profitable low input-low cost pasture based farm systems look a good place to be right now.
Efficient profitable low input-low cost pasture based farm systems look a good place to be right now.
Move to higher input farm systems
Demand has crashed for global dairy products. China has
effectively withdrawn from the global dairy market so prices have rapidly
fallen. New Zealand has captured opportunities from the Asian market (resulting
in very good farm gate milk prices) but is now exposed to the downside risks. Forty
years ago, 90% of NZ food exports went to the USA and Europe and only 5% to
Asia. Now only 20% go to North America and the EU whereas 50% to Asia. There is
more uncertainty for an already volatile dairy commodity market with Russia
banning most food imports especially from Europe and USA but also Australia.
European surplus dairy & grain has been sold into Russia. Russian Food Ban is Serious
Australia will be hard hit by the Russian ban and NZ will need to politically
tread very carefully. Politically going against the USA, Canada, EU and
Australia, by trading with Russia and not being part of the current movement of
“solidarity with Ukraine”, sounds very risky to me. Pasture based dairy farmers
in countries like Ireland, UK and France could also get caught in the cross
fire as unsold stockpiles mount.
This discussion is not complete without reference to current
cereal prices, world supply of wheat, higher yields, decreased demand for
biofuels and the possible impact of the Russian ban on food imports.
This situation could easily result in a
substantial increase in world milk production. Milk production in EU is already
up on a favourable season in 2014.
Dairy farmers need to budget on a lower milk price with a
healthy safety margin. Expect the milk price to decrease further due to the
uncertainty. Monitoring markets will be
as important as the weather forecast.
Hammer down costs, watch the cash flow
like a hawk and delay capital spending.
The farm spender and the farm budget team member
need to be in the same team, working together.
Very bumpy road ahead!
Put the cheque book away! Suspend capital spending plans
