By the Blouin News Business staff

Milk prices turn sour; dairy farmers struggle

by in Asia-Pacific.

A Fonterra Cooperative Group Ltd. processing plant stands in Hamilton, New Zealand, on Thursday, March 19, 2015. Bloomberg/Bloomberg via Getty Images

A Fonterra dairy processing plant in Hamilton, New Zealand, March 19, 2015. Bloomberg/Bloomberg via Getty Images

As French farmers blockade the city of Caen in protest of low milk and meat prices, New Zealand’s dairy industry is reeling as well. Open Country Dairy, New Zealand’s second biggest milk processor, slashed its milk payout forecast on Monday by some 20% for this year. Global milk prices, having more than halved over the past year alongside China’s slowdown, dropped another 11% in the overnight GlobalDairyTrade auction on July 15. They are now at their lowest level since 2002.

As a result, New Zealand-based Fonterra, the world’s biggest dairy exporter, announced it would cut more than 500 jobs out of its 16,000-strong global work force, and warned more layoffs were likely as it reviews its operations. New Zealand’s dairy exports to China, which had underwent a major expansion in recent years, have plunged 69% since the start of the year compared with 2014.

China apparently has a huge amount of milk powder stockpiled, reducing its current demand. “The optimistic view is that there is 150,000 tons of powder sitting in warehouses. I think it’s well over 300,000 tons, but the mix is hard to know,” said David Mahon, managing director of Beijing-based Mahon China Investment Management, which focuses on China’s food and beverage sectors. The latter estimate would equal roughly half the volume of all the milk powder New Zealand exported to China in 2014.

But the slowdown of growth in China and the Middle East is not the only issue reducing global demand for imported milk. Russia’s ban on foreign dairy products (imposed last August in response to Western sanctions slapped on the country over its role in the Ukraine conflict) means a major buyer of butter and other milk products is no longer participating in the global market. Meanwhile, supply has increased as farmers in New Zealand, Europe, and the U.S. established dairy farms in hopes of cashing in on the doubling of dairy prices between 2009 and 2013, while cattle feed prices have remained low. Production in New Zealand, the world’s biggest dairy exporter, has reached record highs— the number of cows being milked (4.9 million in 2014) now exceeds the country’s human population (4.6 million presently).

Australian dairy farmers, in a similarly grim situation, will barely break even over the next year. However, they are less vulnerable to milk price volatility than their counterparts in New Zealand. “We don’t get the dizzy heights of the global market like they do, but, by the same token, we don’t go to the depths of the market when it goes down either because we have a lot bigger domestic market which buffers it to a big degree,” said Noel Campbell, president of Australian Dairy Farmers. If they make it through the next year, many still would like to expand, hoping that demand from China and elsewhere will pick up again in the next few years.

E.U. milk quotas were scrapped on April 1, creating expansion opportunities for low-cost dairy farmers while threatening the livelihood of uncompetitive ones — including many in France. But in contrast to their protesting French counterparts, New Zealand’s dairy farmers can handle the free market (they have received zero government subsidies since the 1980s).

So when the price of milk turns sour, expect New Zealanders to make tough adjustments, and the French to complain.