19 Jul 2015

Ongoing low milk prices expected

8:31 pm on 19 July 2015

A professor of Agri Business at Massey University says dairy farmers will never again see a farmgate milk price in the $8 range.

Whole milk powder prices took a dive for the ninth time in the global dairy trade auction yesterday, falling by more than 13 percent to $1848 a tonne.

Professor Hamish Gow said he was not surprised by the current milk price. He expected it would fall further, and stay low for a few years.

"Some people call me Doctor Doom, because I've been talking about that we've been in a bubble since about 2007 and that milk prices will revert to the mean price, long run average, which is about $4 somewhere.

"That's the million dollar question really - where are milk prices going to go? I think they're going to stay low, other people say they're going to go higher. Will they go back up to $8? Absolutely not."

Professor Gow said international dairy prices were being driven down as Europe and the US increase their milk production.

"And then on top of that, we've got a double whammy, because we've also had China drop back in their demand, we've had Russia pull out of the market and we've now got a milk mountain building of supply.

"Keith Woodford yesterday was talking about 800,000 tonnes of milk powder in China, so five months supply, there's rumours that the warehouses in New Zealand are full, as well as in Europe and other places, so there's a milk mountain building up out there, or at least there's rumours of it.

"We've got decreased demand, we've got excess supply sitting inside storage at the moment, and we've got increased production going on, and so you've got this double whammy effect which will keep milk prices down for a substantial period of time."

He said the low milk payout and falling dairy prices could lead to farmers with high debt being forced to sell up.

"It's the same thing in any business - if you've over-capitalised yourself, you can't get the return out of it. People go bankrupt - someone else will come in and buy it and you'll carry on. It will just change hands.

"Now, there will be some pain for the people who are caught in the middle in that change. Hopefully farmers and the banks will work together to work out how most people can survive through that, but it will be a painful process for a number of people."

Professor Gow said he expected Fonterra will have to lower its forecast payout of $5.25 for the 2015/16 season.

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