Risk of souring on milk

By Gerald Piddock

The new milking season is fast approaching, but what Fonterra’s opening forecast will be is anyone’s guess.

The recent gains in the GDT may be enough to prop up the price so it sits something close to where it currently is for the 2022-2023 season.

Even the 0.9% fall on May 17 is unlikely to have had too much effect on the milk price, according to NZX.

Unfortunately, one thing that isn’t going to change in the near term is the input costs. There’s also the likelihood of a recession in the second half of this year, according to BNZ Markets head of research Stephen Toplis.

“We were always going to have a recession. The question is, how high do interest rates have to go to get us there?” he said during a presentation at an open day held by dairy farming group Southern Pastures on one of its farms in South Waikato last month.

The impact of those rate increases have not flowed fully through the economy and he predicted household mortgages would hit 6.5%.

In the rural sector, a disproportionately high number of farmers have floating rates, and according to new data from the Reserve Bank, the dairy sector is currently paying $1.20/kg milk solids on interest rates.

“What’s even more distressing is that in 2021, that number was 50 cents.”

The bigger issue for farmers is not the payout, but the dollar value of their cost structure, he said.

Those costs will ease, eventually putting farmers in a much better position.

“But at the moment in the next 12-18 months, there’s no way of avoiding it being a really difficult time to operate, it’s just a given.”

Everyone’s feeling the pinch and there will be keen interest to see what farmers’ spend at Fieldays will be like.

Consumers are feeling it too and you have to wonder whether the high prices people are paying for food in the supermarket are starting to impact farming’s social licence.

Near the end of the open day in a panel discussion, Southern Pastures managing director Prem Maan wondered why the dairy industry and wider primary sector are not better supported by New Zealanders.

One big factor and certainly not the only factor is economic food insecurity brought about by the massive increase in retail prices.

It’s hard to support an industry when you cannot afford the products it creates, especially when you have to stare at them every week during a weekly shop.

If you think that’s an exaggeration, go and spend an hour at a Pak’nSave on a Saturday morning and people-watch. Look at the stress people are under as they weigh up what they can and cannot afford on their budgets.

It’s a complicated issue, and while farmers don’t set retail prices, its cold comfort to shoppers. There’s also little appreciation for the costs incurred by farmers around food production. No wonder resentment builds.

This isn’t a new idea. Last year’s KPMG Agribusiness agenda described NZ as having a two- tier food system. One is world-leading, producing highquality food to global consumers. The second gets treated as an afterthought, combining excess export grade products with imported food, food grown by farmers scaled to supply the domestic market, or product that did not meet export standards, and food from community initiatives.

“The export system is highly responsive to the needs of the end consumer. The domestic system is geared to meet the needs of the supermarket duopoly. We talk proudly about one.

“We hardly mention the other. This must change. We need one food system that works for New Zealanders,” the KPMG report said.

Solutions are also complicated. Our domestic prices for meat and dairy are dictated by export prices.

Changing that for dairy would mean re-writing DIRA, which is easier said than done given it has just gone through a revamp.

Even if somehow this occurred and Fonterra no longer set the milk price like it does every quarter, what would take its place? The supermarkets?

You just have to look at how badly farmers were screwed on price over the past decade across the Tasman when supermarket giant Coles slashed milk prices to A$1/L, amending that policy only in 2019.

Sure, it was a great deal for consumers, but farmers, not so much.

But supermarkets can play a role, especially when it comes to price transparency. It’s a pity the government’s response to the Commerce Commission’s inquiry into their conduct did not include more recommendations around this, like making the two main operators publish the wholesale price of what they pay for products every quarter.

And when they inevitably whine about commercial sensitivities, remind them of the economically privileged position they are in as a duopoly operator in New Zealand.

So what can farmers do? Apart from keep telling their story as well as they can – which many do and do very well –the options are limited to keep donating to charities like Meat the Need, which now takes milk as well as meat.

The silver lining is that this high inflation period is expected to eventually ease and interest rates fall. While the long-term outlook for dairy is for reasonably solid demand, those lower rates should make dairy products affordable to NZ consumers if international prices remain high.