ANZ Warns of Milk Price Risks as New Dairy Season Begins
The new dairy season is kicking off with plenty of risks to the forecast farmgate price, both upside and downside, says ANZ agricultural economist Matt Dilly.
He’s urging banks to “play the long game, as opposed to the short game”.
Farmers are paying off debt: Bagrie believes the sector must continue to deleverage. But he warns that farmers’ incomes are under pressure from “a highly uncertain world” and domestic challenges like drought: they loom large on global dairy prices.
“The income side of the ledger looks very good, well the banks would want a fair chunk of that cash but we also need to see sensible heads out of the banking sector in regards to how these things unfold,” he told Rural News.
“We are obviously in a highly uncertain world at the moment: we are also seeing financial pressure increase in the likes of Northland where the drought is starting to bite.
“I just hope the banking sector plays the long – as opposed to the short – game.”
He believes the dairy sector is going through a relatively orderly debt leveraging process: the dairy payout remains the critical part.
“Up around 7 bucks, that is keeping the process orderly….if that income side of the ledger gives way, watch out.”
Bagrie, a former chief economist at ANZ, spoke last week at DairyNZ Farmers Forum in Northland on understanding opportunities and managing risks in the sector.
Bagrie says dairy sector debt has fallen in 2019 to $41 billion: he wants farmers to slash debt by another $10 billion.
“My personal view is that debt needs to go down closer to $30b than $40b: I think we will get there.
“Things have gone a bit out of whack but the sector is going through a corrective phase.”
Bagrie, who now run his own consultancy, says the coronavirus outbreak isn’t helping the dairy sector and the global economy.
The last two Global Dairy Trade auctions have recorded big drops in dairy prices. Whole milk powder price is now below US$3000/metric tonne, from a high of US$3331/MT two months ago.
Bagrie believes the global economy is now incredibly vulnerable.
“Whether coronavirus is the trigger for some sort of credit-related event, we don’t know.”
Bagrie says China takes over 20% of all NZ exports but for some sectors like dairy, export numbers are higher. China takes a quarter of every drop of milk Fonterra exports.
Not all bad news
Cameron Bagrie says he has lot of concerns for the global economy in 2020 looking across all sectors.
However, New Zealand is better placed than other countries to ride out the storm.
“NZ is a small open trading nation: we are going to get impacted by interest rates, currency, commodity prices and demand for exports.
“It’s co-related to what goes around us, we are not immune.”
But there’s not all bad news.
The NZ dollar has fallen against the US dollar, the Reserve Bank still has “policy ammunition” and government books look in good shape.
“We are in a reasonable space to ride out what could be a volatile 2020,’ he says.
