Concern over dairy prices

Waikato farmers were already tightening their belts when they learned that prices had fallen to their lowest point since July 2012 in the latest global dairy trade auction. Waikato’s Chris Lewis, vice-chairperson of Federated Farmers Dairy Section, said farmers should be budgeting for a payout figure of about $5.50/kg. He hopes it will be higher ‘‘but in life you have to budget for the worse-case scenario’’. This slump in farmers’ prospects – albeit after a boom season in 2013/14 – will adversely affect the rest of the regional economy as reduced farm spending ripples through to suppliers and other shops and businesses. DairyNZ data showed the dairy sector contributed $3.8 billion to the Waikato economy, based on last season’s record high milk prices. But by mid-July, assuming last year’s production volumes and a drop in the milk price to $6/kg, that contribution would be pruned by $378.5 million. Dairying generates around 30 per cent of the country’s exports and Treasury forecasters have already revised down the growth projections on which this year’s Budget was based as recently as May. Falls in commodity prices (mainly dairy and forestry) have occurred earlier than the budget planners envisaged in May and the goods terms of trade is declining sooner than previously expected too. One consequence of slower GDP growth in pre-election Treasury forecasts is a reduced flow of taxes and a bit more public net debt than was forecast in May. The debt is expected to reduce more slowly. The Treasury has painted an alternative (and grimmer) scenario, if lower dairy prices are sustained. The reduced terms of trade would flow through to slower income growth and reduced private consumption, dampening demand for housing and weaker house price growth. This would result in lower residential investment. Some economists predict a Fonterra payout low enough to lop about $5b out of the economy this year. Yet Finance Minister Bill English told Radio New Zealand the track for the economy is not fundamentally changed by lower dairy prices. He stands by the tax cuts that are in the offing if his Government is re-elected. But Opposition parties accuse National of attempting to buy the election with tax cuts the country can’t afford. It’s hard to disagree. Lewis should share with the Nats his advice about budgeting for the worse-case scenario.