The volatility in China’s markets is having its effect worldwide. One country feeling a major impact of China’s economic instability is New Zealand and specifically its dairy industry.
China has been New Zealand’s number one dairy buyer until recently but has scaled down its imports by 69 percent since the start of the year compared with 2014, cutting Beijing's share of the country's total dairy shipments to roughly 16 percent from 37 percent last year.
Besides the country’s current market slump and the uncertainty of future economic growth, the Chinese drop in dairy imports can be attributed to its buildup of surplus amounts of milk powder last year right before its economy began to slow.
Fonterra Cutting Jobs Globally
Fonterra, New Zealand’s dairy exporter has now announced that it will be cutting back on its production of daily products worldwide and is laying off more than 500 of its current 18,000 global employees. 11,500 of the total workforce are located in New Zealand.
Fonterra is the world's largest dairy exporter and it has been rapidly expanding its business in China. With a pullback in Chinese exports from New Zealand, Fonterra has decided that it is no longer financial viable to support the volume of its production there.
Dairy Prices Down
Dairy prices have been falling for nearly two years globally, dropping 11% Wednesday to a 12 1/2-year low at the latest global auction and catching the NZ government by surprise.
Minister for Primary Industries Nathan Guy remains optimistic but expects the next six to twelve months could be volatile. Although he was shocked the price had fallen so low, he is confident that prices would come back.
He told reporters, "I am concerned about the fall in the GDT this week. It was expected to fall but perhaps not to the level of almost 11 percent and whole milk powder even being down to about 13 percent….Let's give ourselves some time to work this through. The outlook into 2016 and beyond is still looking very good for the dairy industries."
However, not everyone agrees with Guy’s assessment. Dairy Holdings chief executive Colin Glass, manager of the country's largest dairy enterprise, expects the situation to get worse for the industry before it gets better. He advised dairy farmers to reduce costs and prepare for tougher months ahead.
"There will be no cash coming in for any dairy farmer between now and October," he said. "It is the tightest in terms of cash flow the industry has seen since the early 90s.”
A pessimistic outlook is not limited to Guy. Ropere Consulting economist Peter Fraser believes that low dairy prices will be around for awhile.
"I think what we're looking at is structurally low dairy prices. The world at the moment is …awash with milk at the moment and that means that we've got plenty of other producers in the world that can actually increase production faster and at greater volumes than what (NZ) can," he said.