The possibility New Zealand could be facing another year of drought conditions is a serious concern for the country’s massive dairy industry – and one which has global implications.
Scientists at New Zealand’s National Institute of Weather and Atmospheric Research have warned soil moisture levels are unusually low, meaning without rainfall the country will again be plunged into drought.
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“Sustained rainfall over an extended period of time is needed to return conditions back to normal. Additionally, if current conditions persist or worsen, then drought conditions may be imminent,” NIWA warned.
The announcement has sparked concern over the impact drought could have on New Zealand’s dairy sector. Responding to the news, industry body DairyNZ suggested farmers would be caught between a dry summer, on the one hand, and a low seasonal milk price, on the other.
“We need to see some rain soon to reduce the risk of a normal dry summer turning into something more serious,” general manager of extension Craig McBeth explains.
McBeth says the situation on feed is a “positive story” with grass growth in November and December offering some comfort. “In most regions farmers have already made and stored a lot of supplementary feed like hay, grass silage and baleage. There’s no shortage of feed around at present on-farm or in storage, in most parts of the country,” he observes.
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By GlobalData“However, the issue may be a lack of cash around to pay for it if farmers have to buy it in or cover the cost of transporting the feed to where it is most needed. The low forecast milk price is already putting pressure on farmers’ budgets for this season.”
According to McBeth’s assessment, farmers have taken the learnings of past water shortages. But, in order to offset higher costs, they would need the farmgate milk price to rise.
Securing such an increase is never a pain-free process. World dairy commodity prices would come up on the back of lower supply. However, a decrease in production would suggest a decline in the condition of the New Zealand herd, reflecting financial crises at farms across the country.
As the world’s largest dairy exporter, if New Zealand’s milk production levels are hit by extreme weather it has a knock-on effect for global dairy commodity prices. If the trends of prior years are anything to go by, should New Zealand milk production levels fluctuate, prices could be pushed up – and fast. In 2013, international milk prices rose to record highs as Asian buyers scrambled to secure supply. By the end of the New Zealand summer, prices had surged more than 60%.
This would be particularly evident in the areas where New Zealand generates the majority of its export revenue. Whole milk powder accounted for 42% of sales in 2012; butter, AMF and cream represented for 20% and skim milk powder sales were 12% of total dairy export revenue.
Managing this volatility presents problems for producers and processors alike. The entire value chain is negatively impacted by extreme swings in commodity prices. The bad news is, water shortage and extreme weather conditions look set to become more widespread and significant in years to come. Swings in the price of agricultural commodities are therefore likely to become more frequent and extreme.
According to the World Economic Forum, risk factors related to environmental issues – such as water shortage or extreme weather conditions – are of growing global importance. In its recent Global Risks report, the Global Risk Perception Survey of 900 experts rated water crises as the “greatest risk” facing the world. The report noted a “marked increase” in experts’ negative assessment of existing preparations to cope with challenges such as extreme weather and climate change.
Global food production is at the sharp end. In order to counteract the impact of water shortage and climate change on price and production, the industry should consider more weighty processes beyond market mechanisms or the support offered by industry organisations to shore-up primary producers in such circumstances.
