Dairy farmers advised to plan for lower milk price

Date: 24.04.2020

Rabobank warns that ongoing impacts of COVID-19 will keep downward pressure on global dairy commodity prices

A new report from agricultural banking specialist Rabobank warns that ongoing impacts of COVID-19 will keep downward pressure on global dairy commodity prices through much of 2020.

The industry report (New Zealand Dairy Seasonal Outlook: Battening down the Hatches) indicates that New Zealand dairy farmers can expect a lower farmgate milk price for the 2020/21 season.

Rabobank says a number of factors linked to COVID-19 – including reduced Chinese imports, supply chain disruptions, and consumption pull-back – combined with modestly rising dairy surpluses in export regions, will lead to an extended down cycle in global dairy markets.

Releasing the report, Rabobank NZ CEO Todd Charteris said while a more testing season awaits the country’s dairy farmers, the New Zealand dairy sector was well positioned to manage through the disruptions of COVID-19.

"Over the last three years, New Zealand dairy farmers have seen demand for their products grow strongly and they’ve enjoyed the strong dairy commodity pricing that has resulted.

Many in the industry have taken advantage of this favourable pricing by reducing debt levels and this will help them address the challenges arising due to COVI-19," he says.

"It’s also important to remember that New Zealand’s farmers are among the world’s most efficient producers of dairy products and this places them in a stronger position than most to deal with the impacts stemming from the virus."

Report co-author senior dairy analyst Emma Higgins said Rabobank was forecasting a farmgate milk price of NZD $5.60/kgMS for the 2020/21 season.

"Given the rapidly-changing operating environment due to COVID-19, the forecast settings are incredibly complicated and there are a number of upside and downside risks that could impact the bank’s views on the global dairy markets over the course of our forecast timeframe," she says.

Due to the heightened uncertainty in the market, the report says Rabobank anticipates New Zealand dairy processors will announce conservative opening forecasts for the 2020/21 season.

Emma says this would flow through to any advance rate payments impacting budgets and farmers should plan for this accordingly.

"The adaptability of farming budgets will be crucial over the season ahead, with the need for strong financial discipline required for New Zealand dairy farmers to be in a stable position coming out of this cycle," she says.

"New Zealand dairy farmers have ridden through a similar position before, most recently with the ‘dairy downturn’ in 2015 and 2016. History suggests maximising pasture growth and focussing on homegrown feed, minimising unnecessary cost creep and adopting a proactive approach to risk management (where possible) are key focusses in tough economic times."

In addition to strict budget management, Emma says the less favourable dairy commodity pricing outlook would also require farmers to look closely at their input costs and risk management strategies.