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Latest OECD dairy forecast raises serious questions for economy

The latest global dairy price forecast shows that New Zealand dairy farmers will not reach a break-even payout before 2019 at the earliest, and will not reach the dairy price factored into this year’s Budget until after 2025, Labour’s Finance spokesperson Grant Robertson says.

“The calculations made by the Government in this year’s Budget are based on OECD forecasts, including the price for whole milk powder returning to US$3,400 a metric tonne in 2018.* 

“Many people thought this was wildly optimistic at the time and the OECD’s revised forecasts for 2016 confirm that to be the case. They show the price in 2018 will be $US 2,617 a metric tonne – nearly $800 away from the BEFU forecast. They also show that through to the end of the forecast period in 2025 it will never reach National’s claimed $3,400 figure.

“For dairy farmers to break even they need a whole milk powder price of at least US$2650 a metric tonne at current exchange rates – a lift of 30 per cent from the current position. The OECD’s forecasts push that break-even point back until 2019 at the earliest.

“This has serious implications for the dairy sector and the wider New Zealand economy - dairy’s total direct and indirect contribution to the economy is at about 5 – 6 per cent according to Treasury analysis. Dairy farm debt has risen to close to $40 billion, and represents 10 per cent of bank’s loan books.   

“In this scenario farmers will not be in a position to reduce debt anytime soon. In fact they will require significantly more borrowing for a sustained period, which banks may well have concerns about.

“The Reserve Bank has previously estimated that a scenario resembling that set out by the OECD will see farm prices drop by 40 per cent from their 2015/16 position, with cumulative losses of 8.5 per cent of the dairy portfolio value by 2019-20. This would represent losses of around $3.5 billion on current lending.

“There are flow on consequences in terms of the Government’s own books and whole communities remain reliant on the industry for their livelihoods. The tax take for the Government will be affected by falling farm profits, lower incomes, and reduced spending in rural communities.

“These forecasts are an urgent wake-up call. In contrast to National, which has sat on the sidelines, Labour in government will be an active partner to diversify our economy, producing higher value products with improved land use decision making. It is no longer tenable to sit by and hope that the market will restore our fortunes,” Grant Robertson said.