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 told Rural News that farmers will focus more on good business and farm management and be better at budgeting and understanding their costs. They will drive to generate better profits and overall this will create a more sustainable financial platform for the industry.
Turley says in the past many farmers ran their businesses on low cashflows and profitability, with no real focus on what their true costs were. Good payouts and high land values had shielded them from potential problems, but the current downturn has exposed the fallacy of that business model.
Turley says now is the time for belt tightening.
“There will be good outcomes and we’ll see innovations such as a reduction in farm working expenses. Farmers are very resilient and in situations like this they hunker down.
“When there was an $8.35 payout it was easy and they became slack, which is natural behaviour in a number of industries. If this downturn continues for some time there will be hardship, but at the same time there will also be some good new farm management and business practices emerge.”
Turley says if the downturn continues, he expects land values to fall. The number of farmers needing to exit the industry will to some degree depend on how long the low payout continues. If it goes on for another couple of seasons clearly there will be pain, if it bounces back there will be a lot less.
“As in all industries, some people just aren’t too good at business; equally in the dairy industry there are some farmers who aren’t good farming and business people and this downturn may push them over the edge. But this would have happened to those farmers sometime in the future anyway, regardless of what is happening now.”
He says the casualties of the downturn are those with high cost systems who haven’t adjusted to the present situation as well as those who have just entered the industry.
Turley says it’s going to be tough for sharemilkers.
“We are putting a lot of support around them, but it has to involve the banker, the sharemilker and the farmer.
“The farmers are the other half of the sharemilkers and we all need to get together and help them through this very tight situation. It is always hard for the guy that has just come in or expanded.”
Not all doom and gloom
Graham Turley says people have to be careful not to start spreading doom and gloom about the dairy industry.
He says ANZ has a view that the changing demographics in NZ’s main markets means there will be more demand for protein at some stage. Turley believes that at some point demand will outstrip supply and the rest of the world doesn’t have the natural resources to produce the foods NZ has.
“So it’s a matter of when and we have to be careful about the gloom and doom merchants,” Turley adds. “It’s going to be tough and we have to work through this period, but there is no reason why the good times won’t come back.
“We just have to manage volatility a bit more carefully. The industry is still a strong industry and it will come through this downturn and be much more sustainable – very much like the kiwifruit industry and wine industry,” he says.
