Fonterra’s forecast of its 2015-16 Farmgate Milk price has dropped from $5.25 to $3.85.
DairyNZ chief executive Tim Mackle says this drop will mean a cut of $150,000 from an average dairy farm income.
This will mean farmers will live by more frugal means for at least the next 18 months, Mackle says, and it may even take some farmers many years to recover.
“At a national level, the $1.40 reduction means another $2.5 billion dropping out of local economies,” Mackle says.
“Drops like this have a cascading effect through rural economies.
“We have had a number of rural businesses tell us that they are very quiet at the moment and expect things to get even quieter. Times are tough for all businesses in the rural areas.”
Infometrics senior economist Benje Patterson says with dairy payouts, one season that’s low has a muted effect on retailers and wholesalers.
However, he says when you’re looking at multiple seasons of low payouts, it starts to really have an effect on rural regions.
“Farmers really strip back their spending to their bare bones,” Pattterson says.
“In New Zealand at the moment we’re beginning to worry about what’s happening in regional centres, as this is the second season in a row that the dairy payout has been low.”
He says there’s no real way retailers in rural areas can prepare for the oncoming drop in spending.
“Retailers are going to have to face the facts that farmers and contractors who work for farms are going to tighten their purse strings,” he says.
“They will still spend on the basics, but they won’t have much money left for expenditure.”
He says supermarket and clothing retailers will be somewhat affected, but many people who purchase those things aren’t exposed to the dairy sector.
However, farming wholesalers and farm supply stores are going to face a serious cutback in consumer spending, Patterson says.
“They’ll be the hardest hit, but it’s important to note their business will not go down completely as farmers still need to spend on supplies to keep the flow of milk going.”
Regional impacts of reduced milk price:
The estimated drop in farmer income ($5.25 down to $3.85 milk price)*.
- Northland - $143 million
- Waikato - $692 million
- Bay of Plenty - $177 million
- Taranaki - $259 million
- Hawke's Bay - $24 million
- Manawatu - $113 million
- Wairarapa/Wellington - $86 million
- Tasman/Marlborough - $50 million
- Canterbury - $494 million
- Otago - $134 million
- Southland - $313 million
New Zealand over all - $2.5 billion
*Based on $1.40 drop multiplied against estimated regional production.
Patterson says retailers who have a strong business model for long-term survival and who have access to cash to tide them over should be okay, as dairy prices are expected to recover to a medium-term amount.
He says it will be well into 2016 before stress in the dairy sector eases and confidence in rural regions returns.
It seems the dairy price dropping hasn’t yet had a significant effect on overall spending in New Zealand.
Statistics NZ reports core retail spending rose 0.5 percent in July, following a 0.1 percent rise in June.
It seems as though spending in other regions is keeping the overall retail spend buoyant, as Patterson calls New Zealand a “two speed economy” when it comes to rural regions versus cities.
“Regional New Zealand is arguably slowing down a gear, while cities exposed to service sector are humming along quite nicely, booming from tourism, migration,” he says.
“In regional New Zealand, farming is a very important contributing factor to the economy, so this is where we’ll the biggest dampening of confidence.”
DairyNZ’s Mackle says other sectors will need to help keep the economy afloat in rural communities while the dairy sector goes through this rough patch.
“We need to keep our rural towns going strong while dairy dips. We’re conscious that a lot of businesses depend on the strength and scale of dairy so it’s good to hear that sectors like tourism, viticulture and horticulture are having good growth this year – that should help ensure the viability of rural services and towns,” he says.
He says it’s important to note that in the past five years, there’s been $67 billion brought in to regional economies by dairy exports.
“We will bounce back – but it may take some time, so other sectors will need to step up to help our economy – and that will help us all get through this together.”