Kiwi dairy farmers battered by global free fall in milk prices

Every day, John Fisher loses money.

Surrounded by lush, green pastures — some established more than half a century ago — the New Zealand dairy farmer says his cost of production is now above the international milk price and has been for some time.

“You’ve got to take a long-term view of these things,” Fisher told a group of international farm journalists here recently.

How long can he continue to lose money?

“Not too long,” he said. “All the economists and the experts tell us that the milk price is going to pick up post-Christmas — but they did tell us that this time last year about last Christmas too. So we will see.”

Like most dairy farmers in New Zealand, Fisher’s milk goes to Fonterra Co-operative Group, of which he is a member and shareholder.

Once christened the ‘Saudi Arabia of milk,’ New Zealand and Fonterra have long been held up by critics of Canada’s supply-managed dairy sector as a system to praise and emulate. Fonterra is currently the world’s fourth-largest dairy processor and is responsible for about 30 per cent of dairy exports worldwide. As a country, New Zealand accounts for about 2.5 per cent of the world’s milk production.

But the island nation’s white gold is beginning to tarnish.

With the international price of milk near all-time lows, Fonterra has slashed its farm gate price for a kilogram of milk solids to NZ$3.85 (C$3.41) — a huge drop from early 2014 when it was $8.40. When global milk prices started to slide, the farmer-owned co-op had predicted prices would average about $5.25 this season, which is slightly below the average cost of production.

But that figure doesn’t include debt and that can be high in a country where dairy land sells for as much as NZ$65,000 per hectare ($22,900 per acre).

‘Unprecedented volatility’

Fonterra — which processes about 90 per cent of the country’s milk — recently offered farmers a 50-cent-per-kilogram advance or loan, which will be interest free for two years. Producers will need to begin repaying their loan once milk prices reach the $6 mark.

“We’ve dealt with some unprecedented volatility and geopolitical events in the last while and we’ve made the deliberate decision to get as much cash as we can to our farmers,” said John Monagh, a director of Fonterra, which has recently cut 750 jobs from its 22,000-person workforce.

Out in the Waikato hill country on the North Island, Tracy Brown said her faith in Fonterra and its model remains unshaken.

“We believe in the co-operative,” she said. “We’ve always supplied Fonterra and I think that even though the price has gone lower at the moment, we see that it has highs and lows. We’re in it for the long term. It doesn’t bother us.”

Brown and her husband have just over 700 cows and 320 hectares, land which stands apart for both its spectacular views and environmentally forward initiatives, which have become more and more important as the dairy industry tests the limits of expansion.

Strong prices in the past have encouraged many producers to expand or start dairy farming. The Waikato region alone added 50,000 new dairy cows over a five-year period. Similar expansion was seen in other areas, with one million new cows added between 2007 and 2012, boosting the national herd to around five million.

One recent survey found most New Zealanders believe the expansion has negatively impacted the environment, particularly water quality.

So despite the price slump, dairy farmers are also being asked to implement sustainable practices, such as better managing nutrient run-off, protecting riparian areas and replanting native tree species clear cut for pastures.

The average dairy farmer has had to invest $130,000 over the last three years to meet new environmental standards.

“It’s a fair investment for the farmers, and of course this is a bad payout year, so they’re wondering about how they’re going to pay for it,” said Jacqueline Rowarth, a professor of agribusiness at the University of Waikato. “But overall it’s a huge investment that they regard as important as long as it’s based on science.”

Still confident

Back in the Waikato hill country, Brown doesn’t understand why more producers didn’t see the move to sustainability coming. Her farm began updating environmental practices in the late 1990s, culminating with the installation of a NZ$250,000 effluent system in 2014.

“We have done all this along the way,” she said, describing the effluent system as a way to “future proof” the farm.

While the current downturn has led to a reduction in both production and herd sizes — the average is 417 cows — the long-term impacts of decades of expansion remain.

Larger herds may have increased profits while prices were high, but also increased reliance on purchased feed inputs as the capacity of existing pasture was outstripped. Some experts believe expansion actually offset the natural advantages that made the island nation so suitable for dairy in the first place.

However, expansion is still the New Zealand government’s goal for the dairy industry, but is focused on higher-value products being sold into higher-value markets.

“We can’t feed many more people, we will do a little bit more in time, but we’ve got constraints,” said Nathan Guy, minister of primary industries. “So our vision in government for the farmers here is to double the value of our primary-sector exports by 2025. The important thing here is about doubling the value.”

Fonterra director Monagh makes a case for the future of his co-op by looking to the past.

“We were born out of hardship,” he said, pointing to the abrupt end of dairy subsidies in 1984, which eventually resulted in Fonterra’s creation in 2001. “In hindsight, it’s one of the best things that’s ever happened to our industry — it’s made us stronger.”