While it may not be what farmers want to hear, a Lincoln University expert says price volatility in the dairy industry may be the new normal.
Farm Management and Agribusiness lecturer Bruce Greig says prices will fluctuate widely from year to year ‘’as we have seen’’.
He says the milk price farmers in New Zealand receive is a result of the demand and supply conditions of milk in the international market. It is a commodity market which exhibits characteristic fluctuations.
Dairy farmers may just have to get used to it and implement systems which can cope with these changes, Mr Greig says.
A recent Federated Farmers’ survey found dairy price drops, which are down 46 per cent from their peak last February, had led to increased pessimism among farmers about the future.
Many were worried about cash-flow, and would have to cut spending and increase debt for the first time for several years.
Mr Greig said farmers needed to implement resilient systems which are sustainably profitable at high and low milk prices.
“The traditional all grass New Zealand system might be better at low prices, but might also fail to capture the full benefit of high prices when they occur,” he said.
He says farmers themselves play a key role.
“Farmer capability is more a determinant of profitability rather than the system itself. All systems can be profitable under different conditions, and it is a question about how you manage the risks,” he says.
‘’Therefore your choice of farm system, and therefore cost of production, determines your farm sustainability.”
He says the low payout this year is unfortunately accompanied by drought conditions which lowers production and can increase costs.
As for farmers’ other concerns he said few can avoid debt.
“In fact it makes sense to borrow capital when the return from the investment in land is greater than the interest rate. But you must be able to service that debt from cashflow, which is where the risk emerges with low payouts.”
The dairy industry is a major part of the New Zealand economy and the economic effects of its prosperity affects everyone, he adds.
He is not as pessimistic as the farmers appear to be though.
“Farmers, however, are resilient themselves and will weather the storm until conditions improve,’’ he says.