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A slump in global dairy prices could threaten the pace of New Zealand's economic recovery, as farmers at the center of the country's pillar industry strive to pay down debt on diminishing incomes, commentators warned Wednesday.
Prices on the GlobalDairyTrade platform, run by New Zealand's Fonterra with eight international dairy companies, dropped over Tuesday night to their lowest level since December 2012 as global supply overtook demand.
New Zealand's Federated Farmers said the drop reflected "the most perfect global production season in many years," with output in Europe and the Americas being particularly high.
"The fall in GlobalDairyTrade (GDT) reflects supply and demand. With good weather, high milk prices and grain availability, global dairy production has ramped up," Federated Farmers dairy chair Andrew Hoggard said in a statement Wednesday.
Dairy farmers should plan for a payout of 6 NZ dollars (5.22 U. S. dollars) per kilogram of milk solids, the "practical breakeven for about 20 percent of the industry with high production costs," he said.
The GDT figures were part of a "bad news triple pack" that included an overvalued New Zealand dollar and rising interest rates with the Reserve Bank of New Zealand widely expected next week to lift the official cash rate by 25 basis points for the fourth time this year to 3.5 percent.
"The dollar ought to be tracking down with the GDT and while it dropped a bit today, the Kiwi dollar does remain overvalued," said Hoggard.
In a report last month, the Ministry for Primary Industries forecast New Zealand dairy production for the year to the end of May would bounce back strongly from the drought-affected 2012-2013 season, rising by 9.5 percent to 1.815 billion kg, before rising by another 2.3 percent in the 2014-2015 season, while returns were expected to fall.
For farmers who had invested in boosting herds and production on the back of record dairy prices driven by demand in China, the 2014-2015 season could "prove challenging," said the report.
After next year, it expected returns to begin increasing again "based on the assumptions of a depreciating New Zealand dollar, a trend of increasing international dairy prices, and the growing demand for dairy products to exceed the increases in world milk production."
However, reports that Goldman Sachs has forecast annual global dairy output will exceed demand by 2 billion liters through to 2018a five-year glut that will depress priceshave sparked alarm in New Zealand as it prepares for a general election in September.
The main opposition Labour Party said Wednesday that the 35- percent fall in milk prices since February highlighted the risks of a narrow export base.
"New Zealand is too reliant on one industryrecent falls in the milk price shows our vulnerability," Labour finance spokesperson David Parker said in a statement.
BNZ bank economist Doug Steel told Radio New Zealand on Wednesday that a payout approaching 6 NZ dollars per kg of milk solids would mean a drop of about 4 billion NZ dollars (3.48 billion U.S. dollars) paid to farmers over last year.
"If the currency doesn't actually fall in the wake of these falling dairy prices then it means there'll be a little bit less economic growth out there relative to what would have otherwise been the case. That suggests maybe less need to lift interest rates," Steel said.
Federated Farmers dairy chair Hoggard forecast a big fall in his members' morale and he had a simple message for them: "Be conservative by focusing on debt and prioritizing productive investment."
"The reality is that there will be a belt tightening."
