The cyclical and predictable woes of the dairy sector have elicited some remarkable nonsense from politicians during the election.

Yesterday, the sublimely idiotic Barnaby Joyce declared that concessional loans for drought relief — an extraordinarily inefficient way of protecting inefficient farmers and encouraging them to take risks they wouldn’t normally be able to afford — would be opened up to dairy farmers, even though there’s no drought — there is in fact the opposite, a glut of milk. Then there was Greens leader Richard Di Natale last night urging the adoption of a minimum or floor price for milk — ignoring the disaster that was the reserve price for wool 30 years ago.

But both have missed an important development in the global dairy industry. NZ Dairy giant Fonterra this morning issued its first price forecast for the coming season, which will be $NZ4.25 ($A3.99) per kilogram of milk solids. That’s a 35 NZ cents per kilogram lift in the payout for the current season, which was confirmed at $3.90/kgMS. Helping lift the forecast was higher prices at three of the last four fortnightly GlobalDairyTrade auction (the most important worldwide pricing mechanism for dairy products). The next one is next Tuesday.

Despite that increase (which ends a succession of cuts in the past year), the price for the 2016-17 season remains well under the $NZ5/kgMS level that is reported to be the break-even point for many NZ dairy farmers. Oversupply and weak demand, especially from China, has hit dairy prices in recent years after a peak payout from Fonterra of $NZ8.40/kgMS in the 2013-14 season. And in Australia, the current kerfuffle was caused by Fonterra and Murray Goulburn reducing their farm gate prices from $A5.60 a kilogram of dairy solids to between $A4.75 and $A5 a kg in the past month. So the local prices are still marginally above the price in the world’s biggest exporter with far more efficient farmers than we have in Australia.

Coles in particular makes an easy whipping boy, but the Fonterra price in NZ raises questions about Fonterra’s pricing policies in Australia and why the $5.60 level remained in place for so long when the Kiwi price was being cut successively by the parent. Didn’t anyone at HQ in New Zealand tell the Australian arm to lift its game and lower the price?

As to why there’s a small rise in NZ — last week Fonterra revealed it was making an early third dividend payment to its farmer shareholders and in the statement accompanying that news, revealed how it had been changing its marketing trust away from low yield milk. Fonterra CEO, Theo Spierings said in last week’s statement that despite lower milk collections, gross margins in its ingredients business improved to 16%:

“We have continued to optimise our product mix by adjusting volumes away from reference products, such as Whole Milk Powder, towards non-reference products, such as cheese and casein, to take advantage of the relative pricing. A strong sales performance has resulted in ingredients inventory volumes being 11 per cent lower than the same period last year. Our determination to convert as much milk as possible into the highest-returning products has resulted in an additional 300m litres on a liquid milk equivalent (LME) basis going to consumer and foodservice products in the past nine months.”

There’s a big message there for local companies: Fonterra in NZ has not merely hacked into its costs and staffing levels last year but started to moved from the bulk market to higher priced/yielding products. It is a message for Fonterra in Australia (so why did it take so long to do something like this here?) and Murray Goulburn.

At least, unlike NZ, the dairy pricing stuff-up here and the resulting hardship for many farmers is not an economy-wide issue, nor does it threaten the health of the financial system and banks. The big four Australian banks dominate NZ finance and the economy even more than they do in Australia. Across the Tasman the tens of billions of dollars in loans to the dairy farming sector is worrying the country’s Reserve Bank, government and banks. Here, it’s merely a platform for ignorant politicians like Di Natale and Joyce to force consumers and taxpayers to prop up an inefficient and commercially clueless sector.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey