Higher dairy prices won't bolster regional NZ overnight , Guy says

The recent pick up in dairy prices back to profitable levels may take some time to flow through New Zealand's economy as farmers focus on paying down debt following the prolonged downturn, says Primary Industries Minister Nathan Guy.

Fonterra Cooperative Group, the country's dominant milk processor, hiked its milk price forecast last month to $6 per kilogram of milk solids for the current season, which is above the $5.05/kgMS needed for most farmers to break even and compares with payouts of $3.90/kgMS and $4.40/kgMS in the previous two seasons. Economists estimate the increase in Fonterra's forecast for this season will add an extra $3.8 billion to New Zealand's economy.

Milk processors are raising their milk price forecasts following a 74 percent increase in the price for whole milk powder, New Zealand's key commodity export, on the GlobalDairyTrade platform since early July amid declining milk production in key exporting nations like New Zealand, Australia and the European Union, and as demand picks up from major markets like China.

"I'm feeling a lot more confident," Mr Guy said. "What we are seeing is the supply-demand imbalance correcting itself now which is great. The future is looking I think very bright for the dairy industry, albeit there will continue to be some volatility."

Risks to the pickup in dairy prices include EU stockpiles coming on to the market at some stage in the future, increased exports from the US and the outlook for Chinese demand, although he noted signs that China "is back in the market and pushing up prices through GDT."

Still, Mr Guy said the benefits to the wider economy in New Zealand may take some time to flow through as even though prices are rising, farmers will be focused on paying down debt built up over the past few seasons.

"This dairy downturn has been lower for longer than a lot of people anticipated and I think by and large farmers will be relieved that their banks have stood by them and so I think now there's an opportunity for farm businesses to recalibrate."

The Reserve Bank noted in its latest financial stability report published last month that indebtedness in the sector had increased, "leaving the sector vulnerable to future shocks" and problem loans "are likely to continue to increase for a time."

"Farmers will need to continue to pay down debt because they would have racked up quite a bit of debt in the last couple of years and so their financiers will be looking for them to pay that debt down," Mr Guy said. "While it's certainly looking a lot more positive, it's still going to mean that farmers will need to keep everything in check and make sure that they keep on top of their cost structures, that they run very efficient businesses and I guess look forward to getting back in profit in the next year or two."

As well as paying down debt, farmers are likely to be focused on farm maintenance and upgrades which had been deferred while finances were tight, he said.

"I don't see that the good news is necessarily going to mean there's a whole lot of money sloshing around regional provincial New Zealand, it's not going to happen overnight but certainly the short to medium term is looking very positive for the dairy industry and I'm sure that regional and provincial New Zealand will feel a lot more positive about that," Guy said.

The Ministry for Primary Industries is working with the wider industry to develop case studies of high-performing efficient farmers with cost structures below $4/kgMS, the first of which were released last week.

(BusinessDesk)