Dairy market volatility - pastoral dariy farming in New Zealand's unique advantage

The global outlook for dairy demand is strong but New Zealand dairy farmers must shore up their businesses against likely future volatility in returns, says Fonterra Chairman Sir Henry van der Heyden.

“Our future as dairy farmers in New Zealand, our international competitiveness and this country’s future – it all depends on how we respond to the more volatile markets and ensure we make the most of our unique advantage in pastoral dairy farming.”

Speaking at DairyNZ’s Towards 2020 farmers’ forum today, Sir Henry said “Our farmers need tools in their businesses to manage this risk and to focus on our strength – growing grass and turning it into milk. This is where we lead the world”.

“Our ability to grow grass and turn it into milk more efficiently than anyone else is our point of difference. We simply cannot afford to lose our edge or the control of our productive resources. This is where we need to focus. Then we will have a strong dairy farming legacy to pass on to our children and grandchildren – future generations of New Zealand dairy farmers.”

Sir Henry said: “As farmers we need to concentrate on the fundamentals of pasture-based systems that have provided us with a competitive advantage over other producers in the world.

“There are two key threats to New Zealand dairy farmers: One is other people being able to grow grass and produce milk more cheaply than we can. The other risk is if we get too far down the path of adopting farming practices that make us uncompetitive.”

He said supplements and imported feeds had a place on New Zealand farms, but their use had to be matched with a precise understanding of the impact they have on the bottom line.

Alongside the focus on low-cost, skilled pasture management, Sir Henry said farmers were already putting greater disciplines around their farming businesses.

“The need for business discipline has never been greater in this volatile environment. Dairy farmers should have rigorous planning, forecasting and reporting processes, and many farms now have a governance structure to support their management.”

He said there were also benefits in farmers forging stronger relationships with their bankers and lenders, and tapping into specialised advisors to help in managing cash flows efficiently and maintaining strong balance sheets.

“In times of uncertainty and volatility – the more strength and flexibility we have in our farming business the better,” Sir Henry said.

Sir Henry said dairy was in “a real sweet spot, with huge and growing opportunities across Asia, China, Middle East and Latin America” as a result of global population growth and trends towards foods with health and nutritional benefits.

He said global dairy consumption growth was expected to recover to around 2% by the end of 2010 – adding demand equivalent to Fonterra’s total annual production every year. “With global supply tight – strong demand means prices should remain well ahead of long-run averages. But with much more volatility.”

Sir Henry said the volatility was already evident with month-to-month changes of milk powder prices increasing – in 2006 monthly price fluctuations were typically around plus or minus US$50 a tonne, while today we often see movements above $500 a tonne.

He said with the reduction in US and EU government support programmes, international markets had found more of an ‘economic’ level. In the absence of large government inventories, supply shocks had resulted in increased price volatility within Europe, the US and globally traded dairy markets.

“This makes forecasting such a real challenge. And for farmers it’s hard to budget and get the most out of your farm when you have to factor in plus or minus $2 per kgMS. Volatility is a fact of life, a constant – we better get used to, work with it – and change how we run our farming businesses. Those who don’t might find it tough going in this new world.”