Recession deepens milk surplus climbs

If the demand for widgets drops it’s not difficult for the factories producing them to reduce production.

It’s much harder with plants and animals so although the demand for dairy products has fallen farmers can’t turn off the milk tap and as the New York Times reports  that’s leading to stockpiles of milk powder.

As a breakneck expansion in the global dairy industry turns to bust, Roger Van Groningen must deal with the consequences. In a warehouse that his company runs here, 8 to 20 trucks pull up every day to unload milk powder. Bags of the stuff — surplus that nobody will buy, at least not at a price the dairy industry regards as acceptable — are unloaded and stacked into towering rows that nearly fill the warehouse.

Mr. Van Groningen’s company does not own the surplus milk powder, but merely stores it for the new owners: the taxpayers of the United States. To date, the government has agreed to buy about $91 million worth of milk powder.

. . .  Government price supports provide a price floor for agricultural products as a way of keeping farmers afloat during hard times and ensuring an adequate food supply.

. . . Some critics of farm subsidies argue that price support programs are antiquated and allow farmers to continue producing even when the economics make no sense, as taxpayers will always buy up the excess production.

The USA isn’t along in stockpiling milk powder. The EU is too and  it’s also happening in New Zealand although here it’s the farmer owned company Fonterra and not the government doing it.

Roarprawn asks whether Fonterra shareholders are getting the true picture when Agridata points out that stock piles mean milk isn’t selling.

I was at a meeting in December where we got a frank account of the state of the industry and while whitegold has lost the lustre it had just months ago, the long term outlook is positive.

That doesn’t mean the short to medium term will be easy, especially for those who converted recently when land, stock and building prices were at their peak.  And if dairy farmers are tightening their belts their employees and those who service and supply them will feel the pinch too.

In light of this, farmers who’ve put their efforts, and money, into expensive supplementary feeding systems designed to increase production would do well to remember New Zealand’s competitive advantage is the ability to grow grass which gives us a low cost, pasture based dairy industry.

As for Fonterra, the measure of a company is not how it handles a rising market but how well it does when prices fall and it will be some months until we can judge them on that.

5 Responses to Recession deepens milk surplus climbs

  1. Hi there,

    Just wondering how milk prices today compare with what they were, say, five years ago?

    Are they historically low right now, or are they just off their peaks?


  2. homepaddock says:

    Robert – the price is off the peak but not historically low – Fonterra paid out $3.60 in 2003 and no-one is expecting it to go below $4 this season.


  3. Pique Oil says:

    HP, I understand that a new powder plant is being built in Wanganui at the Imlay freezing works site. Affco is owned by Talleys and with resource consents in place it is a sensible move. It should be seen as a vote of confidence in the future of the powder industry.


  4. homepaddock says:

    Pique – Fonterra is also building more storage at the F&P site near Dunedin.


  5. chas says:

    HP, Whilst I agree no-one is expecting it to go below $4 but Westland suppliers are in for a couple of months of cashflow crisis with having to payback .90c/kgms on the first 4-5 months of this years production. And this on a projected payout of $4.10-4.50. How do you payback money spent on wages, fertiliser, animalhealth etc when I note one of the industries benchmark farms Lincoln University Dairy Farm spends $4,27/kgms on Farm operating expenses!!! Tough times ahead.


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