Kiwi dairy farmers feeling the pinch are right – their payout is the world's lowest

New Zealand dairy farmers bracing for the lowest payout in a decade probably won't welcome the latest analysis of global trends in the industry – their counterparts in every other dairy-producing country are being paid more.

An expected uplift in dairy prices in the overnight GlobalDairyTrade auction won't change the fact Kiwi dairy farmers are the lowliest paid. AgriHQ analysed milk prices from around the world converted to New Zealand dollar per kilogram of milk solids to allow valid comparisons, although some dairy farmers' incomes in other countries are boosted by subsidies and support schemes.

Fonterra's forecast farmgate milk price, which is the price setter in the New Zealand dairy industry, is $3.85/kgMS for the current season, the lowest in a decade. That compares to China at the other end of the scale at $11/kgMS, the US at $8.15/kgMS, Argentina at $7.57/kgMS, and the UK at $6.95/kgMS. Of the countries analysed, Ireland's payout of $6.10/kgMS was the closest to New Zealand's.

Across the ditch, Fonterra buys milk from Australian suppliers as part of its strategy of having diversified milk pools but is being forced to pay a lot more than it will to their New Zealand counterparts because of greater farmgate competition.

The price setter in Australia is its biggest farming cooperative, Murray Goulburn, which takes 38% of the milk produced. After releasing its 2015 profit result yesterday, Murray Goulburn warned it may be forced to cut the milk price it pays farmers below the $A6/kgMS it originally forecast for this season to between $A5.60 and $A5.90/kgMS.

Other processors typically have to match whatever Murray Goulburn pays. Fonterra is due to update its Australian milk price next week and last month said while it was holding to its farmgate milk price of $A5.60/kgMS at that stage, suppliers needed to be prepared for the possibility of a step down in milk price this season.

Fonterra chief executive Theo Spierings was quoted in the Australian Financial Review last week as saying Australian dairy farmers were being paid too much for their milk and that the price didn't reflect the collapse of global prices for key dairy commodities. He was unavailable for comment to New Zealand media this week.

Mr Spierings said there needed to be a change in the method of how Australian farmers are paid so it wasn't just based on the farmgate price. Murray Goulburn boss Gary Helou responded that it had a different business from Fonterra, given 55% of its business was in the domestic market.

Mr Spierings has previously said here that in Australia, Chile, and Brazil the prices paid for milk are influenced by in-market dynamics rather than global prices, so its businesses in these markets have faced higher input costs, although he didn't specify how much higher.

AgriHQ dairy analyst Susan Kilsby said New Zealand has greater exposure to the global market because more than 95% of the milk it produces is exported. In other countries such as Australia, domestic consumption accounts for about 50-80% and prices in domestic markets tend to be a lot more stable than in international ones.

Ms Kilsby said when the dairy market is depressed as it currently is, New Zealand farmers are worse off than anyone else in the world. But, when milk prices were up a couple of years ago, the New Zealand payout rose to a record $8.40/kgMS, while farmers in Australia, the US, and Europe saw a lot less of that upside, she said.

"The big difference here is a lack of subsidies so they have no one to go crying to anymore," she said.

Rabobank senior dairy analyst Michael Harvey said another two reasons Kiwi dairy farmers were more exposed to global price volatility was New Zealand's high exchange rate until recently, and product mix.

"Fonterra produces a lot of whole milk powder," Mr Harvey said. "When the season is at the peak, there is not a lot more it can do with it than dry it, whereas the product mix breakdown in Australia and the rest of the world is different and processors have more flexibility in what they can produce, such as butter and cheese."

A recent Rabobank dairy report said the current oversupply will take longer than in previous cycles to work through. Any slowdown in EU production is being tempered by the end of quotas and milk prices are holding up better than expected due to the weak euro and the cooperative's efforts to prop up prices above spot market returns. In the US, milk prices have been kept above serious pain levels for most producers and Australian prices have been sustained by strong domestic market returns and currency weakness, he said.

"So while in 2009 dairy farmers in all major export regions of the world saw returns collapse more or less together, in this cycle the pain has been asymmetric," Harvey said.

In US dollar terms, as at August 2015 New Zealand milk prices have fallen far more than any other export region. In local currency terms New Zealand is the only major production region in the world to be seeing milk prices even close to those seen in 2009 due to a lack of domestic market and exposure to China and whole milk powder which is the worst hit dairy commodity, the report said.

Fonterra chairman John Wilson has said since Fonterra's formation the gap between what its farmers and their global counterparts are paid has been closed. On average, its farmers are paid the same, if not on occasion more than their peers in these markets, he said.

Federated Farmers dairy chairman Andrew Hoggard said New Zealand dairy farmers understand the international pricing situation and its impact on their returns.

"That doesn't make it any more pleasant," he said. "If you look at the Australian situation Fonterra suppliers are getting a hell of a lot more than Fonterra owners are here in New Zealand."

Fonterra has forecast an additional dividend in the range of 40-50c per share this season and is also offering from today an interest-free loan of 50c for every kilogram of share-backed milk solids produced.

Australian suppliers are currently not shareholders in Fonterra and Hoggard said one way around the transtasman discrepancy in prices may be to make it compulsory for them to buy shares if they want to supply the cooperative as happens in New Zealand.

"The trouble is none of them would be interested in doing that right now. When the payout was $8.40, they might have jumped at the opportunity," Hoggard said.

(BusinessDesk)