Lower dairy prices matter - for all of us

1:07 pm on 10 December 2014

The third cut in Fonterra's forecast dairy payout this season, while no surprise, is another blow to its 10,500 farmers.

The dairy co-operative today cut the expected payout from $5.30 to $4.70 a kilo of milk solids due to a global supply glut and subdued demand in China.

Both dairy farmers and the economy are buffeted by lower prices.

Both dairy farmers and the economy are buffeted by lower prices. Photo: AFP

While Fonterra is assuming an improvement in global prices next year, it warned farmers further downgrades could not be ruled out, reminding them to be cautious in budgeting.

Analysts agree the outlook appears bleak for now, with little sign of a near-term pick up in auction prices.

It matters for the economy too.

Dairy is the country's biggest export, and today's drop is expected to knock $6 billion off the sector's revenue compared with last season.

That translates into between 2.5 and 3 percent of GDP, and will flow through into a worsening current account deficit and puts the Government's projected surplus for the June 2015 financial year at further risk.

Yet the news, while grim, shouldn't be overstated - at least not yet.

Most farmers have banked last season's record payout in advance of lower prices, while they're still receiving some cashflow from current production. Economists predict that could represent $6 a kilo.

That will tide many cockies over this season.

For the economy overall, while the pace of growth will slow, economists point out that the rebuilding of Christchurch and construction in Auckland will continue to support activity, along with a record migration boom and plunging oil prices.

And it is likely to result in a lower dollar, which should provide relief to put-upon exporters.

But another year of low dairy prices could be damaging.

With the payout below already below break-even, the financial stress on many farmers could be enormous.

That would not be good for the country as a whole, as many businesses and banks are reliant on the fortunes of the agricultural sector. The Government's coffers would also suffer as a result.

It also re-ignites the debate about the country's reliance on dairy and China.

While successive governments over the last 30 years have talked about the need for a diversified economy, the global collapse of commodity prices underlines how much the country is still at the mercy of volatile markets.

That lesson appears one that New Zealand still has to grapple with.

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