24 Apr 2015

Downturn could last longer - DairyNZ

3:45 pm on 24 April 2015

DairyNZ chief executive Tim Mackle is warning farmers not be complacent about the challenges they face due to reduced payouts this season.

Tim Mackle, the Chief Executive of DairyNZ.

DairyNZ chief executive Tim Mackle Photo: RNZ / Robin Martin

Mr Mackle told a forum attended by about 150 farmers in Stratford yesterday that the current downturn could become deeper and last longer, and farmers needed to be prepared.

"They've really worked out, probably, that there's a sort of three- or four-year cycle in dairy prices.

"And so the message we're giving is that while they might predict, naturally, an upswing from here, there's a bunch of things going on that mean we really need to be prudent about planning for this going on longer, but hoping it's shorter."

He was concerned that farmers had become comfortable with the peaks and troughs in the dairy payout and could get caught out.

Mr Mackle said supply and demand was driving the situation.

"On the demand side there's evidence that there's been a softening of that particularly out of some of our key markets like China.

"On the supply side good stocks in China, production up, Europe up a little bit - the US not ramping back production too quickly either. Really, a bunch of things have happened all at once - it'll take a little while to work our way through this."

DairyNZ is recommending farmers get a cashflow forecast, put a plan in place to work through the downturn, and get help to implement it.

Mr Mackle said despite the tough times now, the medium-to-long-term outlook for dairy remained bright.

Dairy payout upswing some time off

Dairy farmers at the forum were issued a frank warning not to expect a substantial improvement in payouts until the 2016 - 2017 season, that is the one after next.

Rabobank director of dairy research Hayley Moynihan agrees that despite the long term outlook for dairy remaining positive, the short-to-medium prospects look challenging.

"We're unlikely to see as quick a recovery as we've seen in previous down turns. There's a number of reasons for that. Prices also peaked for much longer than we'd seen in the past, so with any prolonged peak you tend to get a more prolonged trough. So ideas of a quick turnaround are unlikely to happen and we think there's at least a two season impact here in terms of milk price."

Ms Moynihan said her expectation was that prices would improve only moderately next season, that is in 2015-16, and cashflow could be a problem for some farmers because of this season's poor payout.

"The expectation that we have for 15-16 is that we'll get into the mid fives, somewhere between $5-$6 (a kilo of milk solids) for the 15-16 season and then moving up above $6 after that. So it is still a relatively low milk price and certainly lower cash flows."

Pihama farmer Jacques Le Rou said farmers were beginning to get the message that they needed to be resilient over the next 18 months.

"Just in the last couple of months we're really getting it hit home that it's really going to be more of a 12 to 18 month downward spiral, so people are really looking at their businesses now and turning the taps off with their money and really just hunkering down."

Mr Le Rou said he had stripped back the costs of (dairy) conversion on his property while he waited for cashflows to improve.

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