Chance to learn from ‘dairy pain’

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A new industry report says there is potential gain from ‘‘dairy pain’’ if farmers stay ahead of future price curves, Rabobank says.
Experience gained from managing through recent industry downturns should benefit New Zealand dairy farmers if they chose to set up their businesses to be ‘‘one step ahead of the price curve’’, the recently-released Rabobank report, ‘‘Oceania Dairy — Let’s Debt Serious’’, showed, Rabobank said.
Rabobank said the New Zealand dairy sector was particularly exposed to market volatility and dairy farmers needed to strengthen their business structures by rebuilding equity in the next price upcycle and further develop flexible production systems that could easily reduce costs when milk prices fell.
Report co-author, dairy analyst Emma Higgins, said the current severe price downturn marked the third trough in the past decade and the sector must plan for inevitable future volatility.
‘‘Tough decisions will need to be made in the next upward cycle. Farmers will need to make a careful and considered decision whether to put some debt to bed or chase a profit margin through increased investment and spending.
‘‘Ultimately, New Zealand dairy farmers need to be the most costcompetitive among their global peers in order to be one step ahead of the price curve — in both good times and bad. The experience they have accumulated in recent downturns should help them do just that.’’
The report says New Zealand’s dairy industry has a greater need to build resilience, compared with other milk-producing countries, due to its significant exposure to global markets and the resulting price volatility.
‘‘With a minimal ability to sell milk into more stable and often higher returning local markets, compared with other exporting nations, the New Zealand industry is largely at the mercy of global market influences and therefore subject to greater exposure to volatility,’’ Ms Higgins said.
‘‘Because the majority of dairy product produced in New Zealand is exported, both positive and negative shocks affecting the global dairy industry are felt more keenly here.’’
Ms Higgins said the mix of dairy products exported — whole milk and skimmed milk powder make up 59% of NZ dairy exports — also increased the potential price volatility for New Zealand.
‘‘Bulk milk powder will always be the more volatile commodity of the dairy complex, due to its ability to be stored and its basic processing nature.’’
The report also notes that while there is an ongoing push from New Zealand processors to grow and invest in value-added business, there are limits to how much milk can be shifted to higher value streams.
‘‘The simple reality is that, when faced with a wall of milk in the height of the season flush, the options for processing the sheer volume of milk are limited to producing large volumes of powder-based commodities destined for export to the world market. There is nothing wrong with being a low-cost commodity player, as long as the whole industry is prepared for continued volatility and dairy farmers have resilient business structures.’’
With New Zealand dairy debt having steadily increased from $11 billion in 2003 to a current record high of $39 billion, the report says the industry now accounts for 68% of total New Zealand agricultural debt.
‘‘The upward debt trend reflects the expansion of the industry, when improving dairy returns fuelled an improved appetite for land acquisition.
‘‘The expansion can also be partially attributed to New Zealand policy changes introduced in 2010 to provide sufficient liquidity buffers which stimulated credit flows, along with a sustained appetite for lending from some banks.’’
According to the report, the ‘‘average New Zealand dairy farmer’’ entered the current prolonged downturn highly geared and the average debt per kg/MS remains near-record levels at $20/kgMS. As a comparison, the report says the equivalent Australian (Victoria) dairy farm debt is 65% lower, at around NZ $7/kgMS.
‘‘Debt is a useful tool for generating an effective return on equity, along with an opportunity for increasing business growth. Conversely, too much debt can be damaging to the farm business, with little resilience to withstand adverse events,’’ Ms Higgins said.
While until recently returns had been improving on average since 2007-08 — including a record milk cheque in the 2013-14 season — the reports says the ‘‘average New Zealand farmer’’ had opted not to take the opportunity to repay debt in good seasons.
‘‘For some vulnerable farmers there may be a need to strengthen the balance sheet through alternative sources of equity for future downturns.’’
While there was not much upside for prices in the 2016-17 season, Ms Higgins said that Rabobank’s just-released ‘‘Dairy Quarterly’’ forecast prices to rise modestly in the first half of 2017.