Monday 11 August 2014

Oh No! The 'Perfect Bad Storm' for Dairy Farmers World-Wide

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.

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?

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. 
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 China has effectively withdrawn from the global dairy market so prices have rapidly fallen.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

The monitored cash-flow budget will be the most important tool on the dairy farm this year.