Is Dairy Rooted?

The boom in the New Zealand economy has been led by massive dairy intensification. It is also the driver behind silly socialist projects like the Ruataniwha Water Storage Scheme where townie councillors have bought into government and Federated Farmers spin about the future being dairy and they are promoting economic models based on boom years that are unsustainable in bust years. Even so the proposals can’t work without massive subsidies or government grants even in boom years.

Yet no one has really stopped to question what the real long-term price of milk solids is, and if it is a sustainable long-term path to prosperity for New Zealand.

After last years boom prices there was not much consideration to what was going on world-wide, especially with the Chinese Market.

In the Sydney Morning Herald, their business editor wrote a good article comparing dairy in New Zealand to iron ore in Australia. I slammed it at the time, but have had a bit more of a think about it, plus some additional research over the?holiday?break.

Uppity Kiwis feeling boastful about their dollar approaching parity with the mighty Aussie might do well to stick to rugby for their kicks. Their China-driven boom is coming to an end as quickly as Australia’s. And they have less to fall back on when it does.

Meanwhile, reports of Gina Rinehart going long on dairy farms could prove as reliable a warning as many another billionaire diversifying outside his or her area of expertise.

The New Zealand economy’s resurgence has owed much to China’s demand for milk products and getting in early for a comprehensive free trade agreement with the Middle Kingdom.

Trouble is, China has been busily investing and encouraging others to invest in increased and globally diversified milking. Just as iron ore miners have ramped up production both from existing provinces and new projects from Africa to Mongolia, New Zealand’s farmers are facing increased competition from South America to Russia and all points in between, including Australia.

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The ubiquity of the Chinese approach tends to be missed by Australian commentary focused on iron ore. The standard Australian view of Chinese commodity demand is based solely on a housing and infrastructure boom devouring steel.

It’s funny then that milk prices have rather neatly matched iron ore prices since the 2013 peak. Who would have thought milk solids were a key ingredient of steel?

The first phase of the milk boom came in 2007 when the?Global Dairy Trade index?more than doubled to 1691.

It collapsed as the global financial crisis took its toll, recovered and reached a secondary peak in April 2013 of 1573. Iron ore had its own?secondary peak?in February 2013 of US$154.64.

The GDT index held up through 2013 but was one-way traffic in 2014, back to 753 in mid-December. Iron ore averaged $US73.13 in November. Spooky, how those cows and iron ore miners correlate.

So what is happening to the Dairy Price around the world? The arse has fallen out of it. In Britain it is now cheaper to buy milk than water at the supermarket.

Milk is now cheaper to buy than bottled water, and the squeeze on margins has led the UK’s largest dairy company to withhold payments to its farmers.<

First Milk, a Glasgow-based co-operative owned by British farmers, said that payment to 1,000 suppliers would be delayed for two weeks, following a ?year of volatility that has never been seen before.?

“We don’t know how long this current market downturn will last, and we are aware that hundreds of UK dairy farmers are unlikely to find a home for their milk this spring,? said its chairman, Conservative MP Sir Jim Paice.

So there is excess supply in Britain. And in China too.

Small dairy farmers in?China?are dumping milk and selling cows as demand from processors slows in a sharp turnaround from last year, when a scramble for supplies prompted a huge surge in milk powder imports.

Slower growth in milk product consumption, higher yields from modern dairy farms and the excess stocks of imported powders have combined to reduce demand for fresh milk in what has been one of the world’s fastest-growing dairy markets.

Some of the issues with dropping milk solid prices might be alleviated with the current drought, a mixed blessing for farmers who are culling herds. By doing so they are reducing supply, and by reducing supply the market will correct and prices will rise…the farmers should be praying for droughts in China as well.


– SMH, Reuters, The Telegraph