What do plummeting milk prices mean for our fresh water?

Geoff SimmonsEnvironment

This year milk prices have soured like a bottle left in the sun. There has been much wailing and gnashing of teeth about the economic impact of the fall in prices, but what, if anything does it mean for our fresh water? In the short term the price drop is probably good news, and it should keep getting better as dairy companies such as Fonterra help farmers improve their practices. But the long term question always depends on what the milk price does next year, and whether that will precipitate another round of dairy conversions.

The fall in milk prices

We’ve all heard the news – milk prices have dropped from over $8.40 to $4.70 per kilo of milk solids (the powder that is left once you get rid of the water) in less than a year. This has led to a predictable squeal from farmers, whose incomes will fall by around $6 billion, the rural economies that depend on their spending and the Finance Minister, whose greatly coveted budget surplus is now at risk (this could wipe 2.7% off the nation’s GDP). It all goes to prove that old adage – that it takes a year for a farmer to recover from a bad year, but it takes three years to come down from a good year.

Anyone who thought they could bank on milk prices staying at record highs has had a reality check. Thankfully that seems to be pushing the price of dairy land down, as new farmers look to escape crippling debt levels that they may not be able to service. However, the dairy industry still has $32b of debt to service, and international milk prices have yet to bottom out. Thankfully the easing exchange rate and interest rate expectations seem to be offering some relief. Still, a couple of years of poor payouts could start to see some nervous farmers, particularly if that is backed up by a drought, which is threatening in the east of the country.

Tough times means belt tightening…

Bad times for any business usually mean bad times for the environment. The recent Global Financial Crisis has seen many governments around the world shelve environmental pledges (such as reducing carbon emissions) in favour of chasing economic growth. Farming is no different. Good economic times are necessary to make the investments needed to improve the environment. When farmers’ backs are against the wall, some start cutting corners, and the environment can suffer. It is dangerous for any self-respecting greenie to gloat over difficult economic times.

However, according to the latest report on the Sustainable Dairying: Water Accord, the vast majority of dairy farmers have already made the major investments urgently needed to improve water quality. Some 94% of dairy farm waterways are now fenced (although the dairy companies haven’t quite figured out how to ensure their data is robust and consistent), and 93% of farmers have compliant effluent management systems. These numbers aren’t good enough – without a doubt they both need to be 100% – but a poor milk payout this year won’t delay progress too much. The real question the dairy companies have to face is how they will deal with this hard rump of 6-7% of farmers that drag the chain on basic environmental issues. At the moment their threats not to pick up the milk from negligent farmers look like a load of hot air. They have to front up on this issue to retain any real credibility in this space.

The only outstanding investment in the Water Accord is riparian planting. Farmers have plenty of time (until 2020) to prepare a planting plan, and as yet there is no deadline for implementation. So this is the only environmental investment that could potentially suffer at the hands of low payouts.

… but also spend less on inputs

The main issue facing dairy farmers is now nitrogen leaching, which we have talked about previously. This problem is caused by cow pee, which is so intense that it can’t be picked up by the soil, so ends up draining into waterways and contributing to the growth of the weeds that choke our rivers and lakes. The more cows there are standing on pasture, the worse the problem will be, although exactly how bad depends on the local soil and weather conditions.

The only solution to this problem is keeping cows on a feed pad or inside, so their urine can be collected. Housing cows and providing them a meals-on-wheels service (the US or European dairy model) may be better for our rivers, but it is expensive. New Zealand’s dairy industry was built on a low cost model, where cows roam free and get their own dinner. This low cost model is what allowed our farmers to profit when milk payouts were regularly closer to $5 per kilo of solids.

The good news is that most farmers can still switch back to this low cost model to weather lower prices. The even better news is that reducing cost means less fertilizer, less palm kernel, and fewer cows peeing on the grass, which all adds up to a win for our rivers.

Fonterra is trying to help

The dairy companies are all trying to help their farmers understand their nitrogen situation. Currently this initiative is still in the embryonic phase – only 56% of farmers have provided their nitrogen data so far (all are required to under the Accord). This is a disappointing result, but clearly this is a new concept and will take a while to catch on.

Once farmers are measuring nitrogen, they can work with Fonterra’s advisers and a nifty new tool to manage it. And ultimately it is in their interest to do so – nitrogen is a valuable nutrient, and the more they can keep on farm, the more grass they can grow and the lower their costs will be. There is much to be gained for the environment and profits by getting farmers to be more efficient with the nutrients they use.


In the long run…

However, efficiency can only go so far. The ultimate fate of our rivers depends on how we use our land – particularly how much is converted to dairy. Dairy NZ and Federated Farmers continually push the line that certain catchments have headroom for more dairying. What they mean is that some of our rivers and lakes aren’t trashed yet, so let’s keep going. This is irresponsible – the National Objective Framework calls for the quality of fresh water to be maintained or improved. That means any new dairy farm needs to show how water quality will be improved elsewhere in the catchment.

In some areas the challenge is even greater. The harsh reality is that in some catchments there are already too many cows producing too much nitrogen for the fresh water to cope with. In these areas we are seeing severe threats not only to the stuff living in rivers, lakes and estuaries, but sometimes even to the drinking water of rural communities. There will be no alternative but to de-intensify the farming in those areas – another issue that the industry is surprisingly quiet on.

The lower payout has caused many potential converters to pause for thought. But if and when milk prices rise again, the pressure to convert will no doubt return. By then farmers lobby groups and Fonterra need to have a more plausible answer to three crucial environmental questions:

  1. How will they deal with the hard rump of negligent farmers that won’t fence their waterways or deal with effluent properly?
  2. How will they show that water quality can be maintained or improved when more land is converting to dairy?
  3. In areas that have too many cows, how will farming be scaled back?

Without answers to these questions, their genuine and excellent progress will always smack a little of greenwashing – and that’s not the headlines the industry deserves or wants.


What do plummeting milk prices mean for our fresh water? was last modified: December 15th, 2015 by Geoff Simmons
About the Author

Geoff Simmons

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Geoff Simmons is an economist working for the Morgan Foundation. Geoff has an Honours degree from Auckland University and over ten years experience working for NZ Treasury and as a manager in the UK civil service. Geoff has co-authored three books alongside Gareth.