Every day, John Fisher loses money.
Surrounded by lush, green pastures, some of which have been established for more than half a century, the New Zealand dairy farmer says his cost of production is now above the international milk price and has been for some time.
“You’ve got to take a long-term view of these things,” Fisher told a group of international farm journalists here recently.
How long can he continue to lose money?
“Not too long,” he said. “But all the economists and the experts tell us that the milk price is going to pick up post-Christmas, but they did tell us that this time last year about last Christmas too, so we will see.”
Like most dairy farmers in New Zealand, Fisher’s milk goes to Fonterra Co-operative Group, of which he is a member and shareholder.
Christened the “Saudi Arabia of milk” by the Wall Street Journal in 2008, New Zealand and Fonterra have long been pointed to by opponents of Canada’s supply-managed dairy sector as a system to praise and emulate. Fonterra is currently the world’s fourth-largest dairy processor and is responsible for about 30 per cent of dairy exports worldwide. As a country, New Zealand accounts for about 2.5 per cent of the world’s milk production.
But the island nation’s white gold is beginning to tarnish.
With the international price of milk near all-time lows, Fonterra has had to slash its farm gate price for one kilogram of milk solids to NZ$3.85 (C$3.41). In early 2014, Fonterra was offering farmers $8.40 and had originally predicted that farmers would still receive about $5.25 this season. But even $5.25 is below the cost of production for most producers.
Fisher said his cost of production hovers at NZ$5.30 per kilogram of milk solids, and that takes into account changes he’s made to reduce his input costs.
“I mean that $5.30 is the average farmer,” he said. “Some farmers will have lower costs than that, some will have higher.”
High land prices
However, that break-even mark doesn’t take farm debt into account. And in a country where dairy land sells for as much as NZ$65,000 per hectare (C$22,900 per acre), farm debt can be significant.
“It’s quite dangerous to talk in averages, but it gives you an idea,” said Jenny Jago, a strategy and investment manager at DairyNZ, New Zealand’s dairy producers’ association.
She said while not all dairy farmers are losing money, many are experiencing difficulty following the drop in milk prices.
Fonterra — which processes about 90 per cent of all milk produced in the country — recently announced that it will provide farmers a 50-cent-per-kilogram advance or loan, which will be interest free for two years. Producers will need to begin repaying their loan once milk prices reach the $6 mark.
Fonterra director John Monagh said, “as a board we’ve dealt with some unprecedented volatility and geopolitical events in the last while and we’ve made the deliberate decision to get as much cash as we can to our farmers.”
Speaking at the International Federation of Agricultural Journalists annual congress in Hamilton, N.Z. Fonterra preferred to focus on its future investment plans, opportunities in the food ingredients sector and world protein demand, rather than layoffs or recent ratings downgrades.
Over the last two months the dairy giant has cut 750 jobs, and for the second time in as many years, credit ratings agency Standard & Poor’s has dropped the ratings on both Fonterra’s long- and short-term debt.
When pressed, chief financial officer Lukas Paravicini said this year’s downgrade was the result of changes to how companies and co-operatives are rated, not to any particular action on the part of Fonterra.
“Standard & Poor’s has actually changed the way it rates companies, it has created a new agricultural co-operative segment, and it has introduced stricter metrics, which limit the benefits of subordination,” Paravicini said. “I think what you are see- ing in September is a setting in of that.
“And yes, 750 people have left the organization over the last two months, which is unfortunate, but let’s be clear, if you put that into the perspective of 22,000 employees, that’s less than two per cent,” he added.
Out in the Waikato hill country, Tracy Brown is undeterred by the meagre price of milk. Her faith in Fonterra and its model remains unshaken.
“It’s a co-operative, we believe in the co-operative. We’ve always supplied Fonterra and I think that even though the price has gone lower at the moment, we see that it has highs and lows,” she said. “We’re in it for the long term. It doesn’t bother us.”
Brown and her husband have just over 700 cows and 320 hectares, land which stands apart for both its spectacular views and environmentally forward initiatives, which have become more and more important as the dairy industry tests the limits of expansion.
As milk prices soared early in Fonterra’s history, many farmers expanded their herds, while others entered the business for the first time. The result was 50,000 new cows in the Waikato region alone over a roughly five-year period.
Similar expansion was seen in other areas, resulting in environmental strain, land degradation and water pollution. Between 2007 and 2012 one million new cows were added to the New Zealand dairy herd, which today hovers around five million.
A 2014 survey funded by Fish & Game New Zealand found that 70 per cent of respondents believed dairy expansion had resulted in worsening water quality and only 19 per cent indicated they felt the dairy industry should continue to expand.
So in addition to facing sagging milk prices, dairy farmers are also being asked to restore the public’s trust in their environmental stewardship by implementing sustainable practices, such as better managing nutrient run-off, protecting riparian areas and replanting native tree species that were clear cut to make the green pastures that now seem so typical of the New Zealand landscape.
The average dairy farmer has had to invest $130,000 over the last three years to meet new environmental standards.
“It’s a fair investment for the farmers, and of course this is a bad payout year, so they’re wondering about how they’re going to pay for it,” said Jacqueline Rowarth, a professor of agribusiness at the University of Waikato. “But overall it’s a huge investment that they regard as important as long as it’s based on science.”
The phrase “based on science” leads Rowarth to her next concern — that farmers are being asked to spend more and do more than is really necessary to appease public opinion. But, she adds that without social licence, the dairy industry won’t be able to grow.
Back in the Waikato hill country, Brown doesn’t understand why more producers didn’t see the move to sustainability coming. Her farm began updating environmental practices in the late 1990s, culminating with the installation of a NZ$250,000 effluent system in 2014.
“We have done all this along the way,” she said, describing the effluent system as a way to “future proof” the farm.
But farmers who didn’t see the tightening of environmental regulations coming have been hit with some massive costs — costs that not everyone can afford. Especially when com- bined with debt, land costs and low prices.
Suicide isn’t a word often associated with dairy production, but little by little it has crept into the language of those in New Zealand’s dairy industry.
The reason? A report by the New Zealand Herald in January linking 14 farmer suicides to high levels of rural debt, while providing evidence of many more who attempted suicide unsuccessfully.
It’s not the kind of topic people want to go on the record about. Many in the industry have said there is no conclusive link between the deaths and the financial difficulties, but the spectre of such a link has made an impact.
And while the current downturn has led to a reduction in both production and herd sizes — the average is 417 cows — the long-term impacts of decades of expansion remain.
Larger herds may have increased profits while prices were high, but also increased reliance on purchased feed inputs as the capacity of existing pasture was outstripped. Some experts believe that New Zealand’s herd expansion has ironically depleted the natural advantage that made the island nation so suitable for dairy in the first place, by in- creasing production costs and contributing to overproduction.
However, expansion is still the New Zealand government’s goal for the dairy industry, but efforts are now focused less on a larger herd and more on improved production, and higher-value products being sold to higher-value markets.
“We can’t feed many more people, we will do a little bit more in time, but we’ve got constraints,” said Nathan Guy, minister of primary industries. “So our vision in government for the farmers here is to double the value of our primary-sector exports by 2025. The important thing here is about doubling the value.”
Rowarth doubts this ambitious target will be met.
“We’re not, at the moment, likely to get to the government’s goal of doubling the export economy by 2025, because of the downturn in dairy, and… the challenge of social licence,” she said. “Will society let us do what we think is necessary to enhance productivity and decrease risk to production, and protect the potential, whilst remaining economically viable?”
That remains to be seen, but Fonterra director Monagh makes a case for the future of his co-op by looking to the past.
“We were born out of hardship,” he said, pointing to the abrupt end of dairy subsidies in 1984, which eventually resulted in Fonterra’s creation in 2001. “In hindsight, it’s one of the best things that’s ever happened to our industry — it’s made us stronger.”