OPINION: Not so long ago, a payout starting with a six would have been happily accepted by the dairy sector.
Today – with input inflation running rife and interest rates showing no signs of abating – a payout starting with eight is the new norm.
That’s why Fonterra’s latest announcement – bringing the season’s mid-point down to $6.25/kgMS – is a worrying sign.
Last season, dairy farmers produced 1.39 billion kgMS, so with the midpoint dropping $1.25 that is almost $1.8 billion not coming into the country’s economy. And this doesn’t just affect Fonterra suppliers. Other milk processors are also facing the heat. NZ’s peak milk season could make things worse.
The key driver of the weak short-term price outlook is weak Chinese demand, noting that China is comfortably our largest dairy market.
Unlike most economies post their Covid lockdowns, China’s post lockdown bump in economic activity has underwhelmed expectations.
Analysts have cut their outlook for Chinese economic growth for 2023 from 6.2% in June, to 5.7%, and then to 5.2%.
Many dairy farmers are bracing for losses and making changes to the way they farm, and hoping the market will rebalance.
Global milk supplies are subdued and very likely to contract further as farmers globally are not making money at current farmgate prices.
Any tightening in supply will help rebalance the market, but we are now heading into peak seasonal supply for the Southern Hemisphere dairy-exporting nations.
New Zealand’s spike in milk supply in the coming months means there will be more product to sell in the near term, while the market is still weak.
Ironically, this could lock in a payout starting with a six.
