Best known as the land of the Hobbit, it is cows that have driven New Zealand’s $180bn economy in recent years at an annual 3 per cent clip. As the world’s biggest milk supplier it rode the wave of China’s increasing appetite for ice-cream, baby formula and all things dairy.
But China’s slowdown has tempered its demand for soft commodities as well as iron ore and steel, while a global glut and Ukraine-prompted sanctions have halved milk prices since February 2014. With dairy accounting for about a third of its exports, New Zealand, like its bigger Antipodean neighbour Australia, is feeling the strain.
Culls of cattle — and jobs — are expected to follow. The kiwi dollar swooned 2.6 per cent against the greenback after Thursday’s 0.25 per cent cut by the Reserve Bank of New Zealand to 3.25 per cent.
The RNBZ also signalled the possibility of further easing.
“The weaker prospects for dairy prices and the recent rise in petrol prices will slow income and demand growth and increase the risk that the return of inflation to the midpoint would be delayed,” it said.
One of the most visible signs of the stress affecting the dairy sector is a record upsurge in slaughterhouse activity. Analysts estimate that 1m dairy cows will be killed this year, probably resulting in the first herd reduction for almost a decade.
Employment is another casualty. Fonterra, the co-operative that controls almost 90 per cent of the dairy industry, is to cut its 16,000 workforce, with details to be unveiled in August.
“The world has changed and the unprecedented global volatility we’re experiencing now is the new normal,” said Theo Spiers, Fonterra chief executive. “It affects the entire dairy industry, but we recognise the need to reset our business accordingly — what worked in the past doesn’t necessarily work now.”
Rabobank is forecasting a near halving in dairy farm income to NZ$8.3bn (US$6bn) this year from NZ$15.8bn in 2014, as lower prices bite.
“Farms will have to cut back expenditure,” said Hayley Moynihan, a Rabobank analyst. That will mean reversing the big spending of previous years; herd numbers rose almost a third to 6.6m in the past decade.
The RBNZ has warned a quarter of dairy farmers will experience negative cash flow this year, which rating agency Fitch says will put pressure on the banks.
Agricultural loans make up 15 per cent of total bank claims, with two-thirds of them related to the dairy sector, according to Fitch.
“The fall in the terms of trade is beginning to flow through to the economy,” said Con Williams, an economist at ANZ Bank. “This year will be pretty tough for farmers as the price they get paid for milk has been cut back, which forces them to cut back on services.”
Source: Food & Beverage
