NZ milk production to fall at rates not seen since 90s

New Zealand milk production could drop at rates not see since the late 1990s as the world’s top producer struggles with weak pricing amid a global glut of product, according to a report from the Bank of New Zealand (BNZ).

BNZ said a poor start to the season meant it was revising down its forecast and it now expects the 2015-2016 season “to be down 6 percent on the previous year. This is a bigger decline than the 4 percent drop we previously anticipated”. Since 1999 output hasn’t declined by more than around 3 percent from season to season.

Total dairy cattle numbers to the end of June this year totalled 6.51 million, down 2.8 percent on a year ago, according to the bank, which said that very low milk prices encouraged cattle culling. In total more than a million cattle were culled over the year.

The bank did offer a glimmer of hope, saying dairy prices have rebounded by nearly 50 percent over three months, albeit from low levels, and that “further gains lie ahead. We see $5 per kg of milk solids by the time the milk price is finalised this time next year.”

BNZ also said that price gains pointed to higher dairy sector revenue, potentially up by NZ $1 billion ($652 million; €582 million) on 2014-2015 levels, even if milk production was to fall by 6 percent. However they cautioned that even if this forecast on revenue materialised “it would still be more than $5 billion down on that achieved two seasons ago and almost $2 billion shy of the average of the past 5 years.”

The bank also pointed to recent numbers by Fonterra, New Zealand’s co-operative and biggest processor, as a marker for the industry’s current woes, with the company saying its milk intake was down as much as 8 percent on a weekly basis through September. “Lower production to this point reflects a combination of poor winter and early spring weather, likely fewer cows in milk and low milk price,” the bank said.

Last winter Fonterra cut its farmgate milk price forecast for 2014-15 to NZ$4.70 per kg of milk solids, which represented an estimated NZ$6.1 billion reduction in farm income on 2013-14, and a price below the cost of production for many dairy farmers.

This volatile pricing could hit investment in New Zealand’s dairy industry, KPMG warned recently. In a report the accountancy firm said the dairy industry has been the target of significant backing from overseas investors in recent years, with investment in the sector accounting for over half of all disclosed agribusiness investments in the country, 49 percent coming from investors in China and Hong Kong.