New Zealand farmers concerned about declining demand for milk and lamb

Farmers are already tightening their belts – but slowly, the realisation is seeping through the wider business community that the whole economy will suffer the impact of lower milk, lamb and timber demand.

Dan Walker was born and raised on a sheep and beef farm, but for the past 20 years he’s worked in Levin selling and maintaining farm-bikes. The Honda TRX quad is the workhorse of today’s farm, he reckons, but inquiries are slowing.

Instead, farmers are sweating their old bikes for as long as they can. “You can write the repairs off your books, so it probably helps with your tax.”

He and his wife, and their young sons Blake and Zack, will have to tighten their belts like the farmers, and like everyone else in the Horowhenua community. “Yeah, well and truly. Farming is still the backbone of 80 percent of the country, not that most people realise it.

“It’s not affecting people initially in the towns but it will filter through in what you’re paying in the supermarket for your meat and vege. This is going to affect everyone.”

At this week’s global dairy auction, the average price fell 7.4 percent to US$2,875 (NZD$4,830) a tonne – its lowest mark in five years. At the same time, lamb prices are forecast to drop to $7 per kilogram, meaning farmers will be paid about $40 per head less than in the past two years.

Rabobank senior agricultural analyst Emma Higgins reported last month that sheep farmers – who send 50 percent of their meet to China – were desperately waiting for the Chinese market to rebound.

As has been said so often before, when China sneezes, the world catches a cold. Rising unemployment and a slowing economy in the People’s Republic are leaving its 1.4 billion citizens with less to spend on discretionary products – and to them, milk and lamb are discretionary.

“As farmers stop spending,  this will be felt through regional economies and the wider national economy. Exporters will bear the brunt. But not necessarily all of the pain. If the NZ dollar falls as a result, it effectively transfers some of the pain to consumers via higher than otherwise prices.”
– Doug Steel, BNZ

With demand struggling to recover after the pandemic, whole milk powder prices have plummeted. Fonterra had already cut its forecast farmgate milk price by a dollar, to $6.25 to $7.75 per kilogram of milk solid. That’s a midpoint of $7/kg.

Then last week, Synlait followed suit – and analysts say the two producers may yet reduce prices further.

For farmers, $7/kg is well below break-even, which DairyNZ and others have calculated at about $8.50/kg. So they will be cutting costs wherever they can.

That flows through to farm services companies like Paul Bromley’s pump firm; he in turn is seeing the carparks thin out at the nearby Countdown supermarket and The Warehouse across the road in Feilding.

“When the dairy farmers and the sheep and beef farmers have got money, the supermarket’s humming,” he says. “They’ll still be humming at eight o’clock at night. But when the farmers have no money, I’ll go down there now, and there will be only four or five cars.”

“I see people lined up at their coffee carts, or out for dinner and stuff. Do they even know where their money comes from? Do they even know where the milk in their coffee comes from?”
– Brian Lett, TransAg

And it impacts on farm suppliers like Dan Walker and Palmerston North tractor salesman Brian Lett. Those in provincial communities are increasingly aware of the cascading impact of farmers’ cut in incomes – is the same true in the cities?

“I feel the pain, just like the farmers feel the pain, and it can be mentally tough for everybody,” Lett says. “But in the metropolitan environment, they don’t understand that a farmer can work 14 hours a day, seven days a week, and he can religiously keep going for the whole year like that.

“I see people lined up at their coffee carts, or out for dinner and stuff. Do they even know where their money comes from? Do they even know where the milk in their coffee comes from?”

This week, the Reserve Bank held the official cash rate at 5.5 percent, and indicated it had no plans to cut rates until early 2025. Yet beneath this hawkish grip on the economy, Governor Adrian Orr signalled emerging concern that a slowing Chinese economy could drag down New Zealand. Indeed, the Reserve Bank mentioned China no fewer than 37 times in its monetary policy statement.

“Over the medium term, a greater slowdown in global economic demand, particularly in China, could weigh more on commodity prices and overall New Zealand export revenue,” he said.

Late last year, Orr said the bank would push New Zealand into a recession, if that was what it took to rein in inflation. He may get his wish.

“Fonterra at least seemed to foresee this [and] in terms of other export sectors, yes meat and log export prices are weak. Logs and forestry in particular are heavily exposed to China and the very weak Chinese property/construction sector.”
– Nathan Penny, Westpac

Barclays Bank’s India-based analyst Shreya Sodhani says: “The Reserve Bank did note that pockets of stress are developing … A faster contraction in activity may also lead to a quicker cut. The bank today sounded more concerned on growth due to external headwinds such as a slowing China and weaker commodity prices.”

Westpac senior agricultural economist Nathan Penny says that at this stage, the bank’s economics team is not forecasting a recession. “However, the magnitude of the fall in export incomes does increase the risks that the economy does dip into one,” he tells Newsroom.

“Fonterra at least seemed to foresee this [and] in terms of other export sectors, yes meat and log export prices are weak. Logs and forestry in particular are heavily exposed to China and the very weak Chinese property/construction sector.”

He says the falls in commodity prices will continue to flow through to weaker export incomes over the remainder of this year and into 2024. “While the income reduction will initially hit the agricultural sector, there will necessarily be flow throughs to the broader economy as farmers rein in consumption and investment spending.

“Notably, regional New Zealand will bear the brunt of this slowdown. Overall, we should expect some reduction in economic growth as a result, with the magnitude depending on how this reduction in farm incomes flows through to broader business and consumer confidence.”

BNZ senior economist Doug Steel takes a similar stance. “Overall,” he says, “it’s generally negative for the economy when your largest export product falls in value. Milk processors don’t typically reveal the underlying product price views. But fair to say, I think that current prices are below what they need to average for the season to achieve a $7 milk price.

“The economic hit comes first from a hit to the terms of trade – it lowers the country’s purchasing power.”

That in itself won’t tip New Zealand into recession – but it’s a step in that direction. “In terms of real GDP that comes later as the reduced purchasing power lowers activity (like consumption and investment). Ironically, in the near term, strong volumes (milk production and dairy exports) will support real GDP.

“As farmers stop spending,  this will be felt through regional economies and the wider national economy,” he adds. “Exporters will bear the brunt. But not necessarily all of the pain. If the NZ dollar falls as a result, it effectively transfers some of the pain to consumers via higher than otherwise prices.”

Tags: Milk, New Zealand, lamb