Global market conditions for dairy products point to at least two more seasons of low milk payouts in New Zealand, Westland Milk Products, the Kiwi co-op, has told shareholders.
The co-op revised its predicted payout for the 2015-16 season to $3.90 – $4.00/kg of milk solids, down from last month’s prediction of $4.00 – $4.10.
Westland CEO Rod Quin said the major driver of the revised payout remains the global oversupply of milk, compounded by the ongoing high availability and aggressive approach by the European dairy market.
Quin and Westland Chairman Matt O’Regan recently returned from Europe where they met with customers, farmers, processors, traders and industry advocates.
Quin said that the clear and consistent message they received is that European milk growth will be higher and more aggressively promoted by European farmers and processors than expected, both within Europe and, more concerning to New Zealand, the international markets.
The effect of this is likely to be a longer time frame for the downturn in prices; expected for another two seasons.
“This will lead to relatively lower pay-outs and a resulting impact on New Zealand dairy farmers.”
However, Quin said, there are indications the global over supply of milk will correct itself, but not quickly.
“We were expecting European processors and farmers to be already feeling some economic pain that might cause them to reduce production, but this is not the situation for most.
“This is due to the relatively low debt levels incurred by European farmers, and environmental considerations with respect to nutrient levels not an effective constraint on most farmers compared with New Zealand.”
On the demand side, Quin said that the view was consistent that even if Russian sanctions were lifted, there would be little increase in demand as consumers there have shifted to cheaper cheese alternatives while incomes, therefore spending power, for many Russians have been negatively impacted by the lower oil prices.
He said the situation in Europe and ongoing growth in the United States left Westland with no choice but to reduce payout predictions further and warn farmers that there will be some tough seasons ahead.
“A return to low cost pasture based farming is required for New Zealand dairy farmers to weather the global supply changes.
“While the immediate outlook is tough there is a positive future in dairying as consumers around the world continue to purchase quality dairy products that are safe and nutritious.
“During our meetings in Europe we noted several examples of where high quality, added value marketers were still doing well and this reinforces Westland’s strategy to continue to move away from bulk commodities into added value, high end products.”
