Interest Rates

[Wayne]

Did anyone see 2014 price declines
in their 2013 crystal ball gazing?

It happened not that long ago.
When the price of protein (milk) got high enough people changed to other forms of protein.
Most recently price went up due to shortage of supply (NZ drought) so NZ farmers increased production
during a particularly good couple of seasons.
Increase supply and price goes down.
NZ needs to reduce supply (store what they have and drip feed) to increase price.
It has been said that the break even point is $5.50 so less than that and farmers will go broke.

[speights boy]

It has been said that the break even point is $5.50 so less than that and farmers will go broke.

Is that based on 'average' debt on the 'average farm' ?
Surely it's not dissimilar to a landlord.
Big big difference between those with 100% mortgage and those debt free.

[Wayne]

Is that based on 'average' debt on the 'average farm' ?

I think that is what it means.

[speights boy]

That's why a figure such as that would need a lot more evaluation.
For example:
Have some farmers been 'farming for capital gains' (tax free) by using booms to increase debt to buy more land;
versus
Those who are 'farming for income' (tax paid) by using booms to reduce debt ?

Property investors also fall into similar categories .....as per the other active thread on booms.

If some are now over leveraged and are forced to sell off parts due to market corrections, then that should not necessarily be taken as overall an industry in crises.

[Wayne]

While I am sure that is true it does mean, on avaerage, some farmers will be in deep cow doos if the payout falls too far.

[elguapo]

That's why a figure such as that would need a lot more evaluation.
For example:
Have some farmers been 'farming for capital gains' (tax free) by using booms to increase debt to buy more land;
versus
Those who are 'farming for income' (tax paid) by using booms to reduce debt ?

I think it's clear from the Super Coach thread that reducing debt during a boom is just stupid........

[speights boy]

While I am sure that is true it does mean, on avaerage, some farmers will be in deep cow doos if the payout falls too far.

Sure, however:
The young share milking couple who are currently priced out of ownership, get to buy a farm based on new income / debt levels.

[elguapo]

It happened not that long ago.
When the price of protein (milk) got high enough people changed to other forms of protein.
Most recently price went up due to shortage of supply (NZ drought) so NZ farmers increased production
during a particularly good couple of seasons.
Increase supply and price goes down.
NZ needs to reduce supply (store what they have and drip feed) to increase price.
It has been said that the break even point is $5.50 so less than that and farmers will go broke.

The dynamics are slightly different.

New Zealand is the major player on the export market true, BUT, in total milk production we are tiny. 98% of NZ milk is exported, most other countries export very little as they are simply not competitive and are dependent on domestic subsidy.

With high dairy prices, producers in the EU/US actually become profitable when they export. That means they can switch their massive production to the export market.

NZ is the lowest cost producer.

Put that together and NZ's best interest is to have the milk price lower than those US/EU producers can afford, but only just. NZ total production actual makes little difference to the market as such, as long as those overseas producers are not economic.

[Wayne]

Put that together and NZ's best interest is to have the milk price lower than those US/EU producers can afford, but only just. NZ total production actual makes little difference to the market as such, as long as those overseas producers are not economic.

Agreed mostly.

Overseas producers can't divert local supply to the export market.
With NZ having a huge % of the export market share we go a long way to control the price.
If we reduce supply we can hugely influence the price.
I agree we want the price to be below what others can produce
but we need the price high enough to cover costs and it isn't at the moment (or heading that way).

[Meehole]

Did anyone see 2014 price declines
in their 2013 crystal ball gazing?

Yes I was told 9 months ago that this might happen, same person also said that house prices would drop. He has not answered my question yet about fixing the mortgages.

[muppet]

Milk production is up in the USA, Europe and NZ.
I don't think that NZ can dictate the price very much.
If NZ could, why has it dropped 40% since February.
I heard today that farmers could expect a payout of $5 next year.
If that comes to fruition, ouch?

[elguapo]

Overseas producers can't divert local supply to the export market.
With NZ having a huge % of the export market share we go a long way to control the price.

The US can shift supply to export on a large scale, and quite quickly too. The EU can also has a large capacity to ramp up, production climbed 6% there in just the first 4 months of the year, over a year that extra production would be more than NZ alone produces in total.

but we need the price high enough to cover costs and it isn't at the moment (or heading that way).

The largest cost in production is land price, lower prices mean lower land costs. It's a delicate balance meaning those who have leveraged up in the last year or two and need $6-7+ just to survive will suffer badly, but better that than NZ losing it's edge.

[Wayne]

The US can shift supply to export on a large scale, and quite quickly too. The EU can also has a large capacity to ramp up, production climbed 6% there in just the first 4 months of the year, over a year that extra production would be more than NZ alone produces in total.

I have no direct knowledge of the various capacities or capabilities to export (milk products like whole milk powder not raw milk) and only know what I have read and heard.
What I have read and heard in recent days is at odds with what you say.

[elguapo]

I have no direct knowledge of the various capacities or capabilities to export (milk products like whole milk powder not raw milk) and only know what I have read and heard.
What I have read and heard in recent days is at odds with what you say.

I wonder if those sources are really aware of just how many dryers etc. have been completed, or are being completed in recent times?

[Wayne]

I wonder if those sources are really aware of just how many dryers etc. have been completed, or are being completed in recent times?

I wonder too.
Maybe they should be asking you?
These are people whose business it is to know.