Boom times in dairying?

The outlook for dairying appears to be very strong. What are the issues surrounding this? And how might the industry look in 3 to 5 years?

Well to begin with, I feel that it is noteworthy to state that our dairy product is unique in many ways. It can be made into 140 different products and many are not just food items either. Dairy products are a basic necessity to our lives.

The rapid rise in price for all dairy products has taken most people by surprise. Many commentators said they never saw it coming. One of the key issues here is that the shortage of food in the world has been rising. We have gone from "butter mountains" and "grain mountains" to, I understand, only 38 days of stored food. This will have, and already has had, a huge impact on the demand for all food. As prices rise for dairy, most other forms of food are likely to rise as well. There is already talk about beef and lamb prices rising and so on.

As the world demand has increased for all commodities, dairy is just following the trend. More than that, dairy prices have been inclined to follow oil prices. It is well known that oil is in strong demand right now and the world is looking for new sources daily.

The fallout from all of this increased demand and elevated prices is that the poor nations may no longer have surplus product made available to them, so they could find themselves more poverty stricken than ever. On top of this, we are likely to have rising grain prices due to the impending shift in land use to crop for biofuel production. Again, the follow on from that is a shortened supply of human food source as the grain that was available to directly feed humans is now going to biofuel production, which will increase the demand for dairy products.

So how is all this going to affect the average dairy farmer?
  • Well, as demand increases and supply does not, you will get an increase in price.
  • Pay-out for the 07/08 season will be strong. Pay-out could go higher as demand increases. The outlook for owner operators is strong over the next 5 to 6 years.
  • What will happen if some countries begin to stockpile food? Like China storing coal in the sea. Demand will rise and hopefully nobody will start panic buying.
  • Fonterra has forward sold a lot of product with contracts up to 18 months. That means they have forward contracts signed so that's good, but if prices rise further will they be able to supply the spot market?
  • Fonterra manages a very large proportion of the tradeable dairy product in the world and they will have their work cut out managing that change.
  • Fonterra may need more funds to manage this change; this could be one of the reasons for Fonterra's capital structure review.
  • Back home, dairy farmers could expect their dairy farms to rise by 10% to 15% in value over the coming season. I understand some of the Registered Valuers are saying that in their valuation reports already.
  • The price of good quality cows will also rise. A cow has always been worth approximately 1 year's income produced from her. Let's look at the figures:
    Old Price: 350kg per cow $4.34 per kg = $1,519
    New Price: 350kg per cow $6.00 per kg = $2,100
It is clear already that the price of good quality cows are around $1,500 with prices likely to rise as the demand increases.

My advice to farmers is to stay steady. Think about what you are doing and be rational. Build a good infrastructure and be realistic about what you are doing. Run simple systems, take good advice and use it.

Farm labour will be a big issue and the milk harvesting staff will need to be properly cared for. You need to have good ownership structures to carry your land forward to the next generation. You need to receive the extra pay-out before you spend it. There will be more change coming and you need to keep abreast of it.

The outlook for dairying looks exceptional, so capitalise on the opportunities in a sustainable way. We will have a two tiered economy with the farmers doing really well again and the town people not doing so well on the back of high interest rates.

Agriculture underpins this economy and it is a classic example of 'no farms, no food'.


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