By Jon Hilsenrath and Rebecca Howard
New Zealand’s milk industry shows how commodity-producing countries across the world are struggling after having overestimated demand from China’s fast-growing economy.
As with sugar producers in Brazil, rubber farmers in Thailand and iron ore miners in Australia, New Zealand’s milk producers are coming to grips with the reality that Chinese demand didn’t materialize as expected when capacity was put in place many months back.
Chinese imports of whole dry milk powder soared to 619,000 metric tons in 2013 from just 46,000 in 2008, according to U.S. Department of Agriculture data. Farmers in New Zealand ramped up production to supply the growing demand, adding 450,000 metric tons of capacity during that stretch, an amount that is equal in weight to about one billion 16-ounce milk containers.
China’s imports of dry powder milk have since flattened. Its inventories of the product tripled between 2011 and 2014, and prices tumbled, according to the USDA.
“World markets are oversupplied with dairy commodities after farmers globally increased production in response to the very good milk prices paid 12 to 18 months ago,” said Kelvin Wickham, managing director of global ingredients at Fonterra Co-Operative Group Ltd., the big New Zealand milk cooperative.
It is having aftershocks for the New Zealand economy, which posted just a wafer-thin trade surplus in April, largely because of weak dairy prices.
“The value of whole milk powder we sent to China in April 2015 was a fifth of the April 2014 value,” said Statistics New Zealand’s international statistics manager, Jason Attewell. “Volumes were a third of what they were in April 2014, and lower prices made up the rest of the fall in value.”
Whole milk powder prices have tumbled to $2,390 per metric ton at the latest auction on GlobalDairyTrade, an internet platform, from $5,000 in early 2014.
In March, Fonterra reported a 14% drop in revenue from a year earlier and said it would cut its dividend. Among the steps it took was to write down the value of its cows, including nearly 50,000 in China. Last week it reduced its payouts to farmers to NZ$4.40 a kilo, stripping more than NZ$6 billion out of farmers’ incomes compared with the prior season.
The Reserve Bank of New Zealand says the global milk outlook hinges on Chinese consumption.
“The extent of recovery in Chinese milk demand, following a large build-up of inventories in 2013, will be an important influence on global milk prices,” said Gov. Graeme Wheeler in the central bank’s recent financial stability report.
The reserve bank has flagged the dairy sector as a major risk to financial stability. According to the RBNZ, around 25% of farmers have negative cash flow for the current season, and “financial stress in the dairy could rise markedly if low global milk prices persist beyond the current season.” The central bank expects some recovery in global milk prices in the 2015-16 season but says there is considerable uncertainty over the extent and timing.
It isn’t just New Zealand feeling a fallout. U.S. consumer milk prices have dropped in six of the past seven months. They are down 7% since September.
Fonterra CEO Theo Spierings said in an interview that he saw signs that Chinese buyers were “getting back into the market,” but volumes were much lower. He expects whole milk powder prices to recover to US$3,500 a metric ton by April or May of next year, still well short of levels reached early last year.
“I don’t see that anything has changed in the demographics, with the middle class and the aging population increasing,” Mr. Spierings said of the longer-run outlook.
The U.S. Department of Agriculture isn’t so sure that prices will recover.
“The surge in Chinese demand in 2013 and into 2014 was the result of several factors including rapid reduction in domestic production,” the USDA said in a May report on the New Zealand milk industry.
“It may take several years for Chinese demand to match the levels reached in 2013 and 2014, which suggests that export price recovery, which will make a significant difference in farmgate prices, may be slower than many farmers and commentators are hoping for.”
How China’s Taste for Milk Actually Hurt the Value of New Zealand’s Cows – Real Time Economics – WSJ