A shepherd milks a sheep at a grazing ground
A shepherd milks a sheep at a grazing ground on a cold winter morning on the outskirts of New Delhi January 7, 2014. Reuters/Anindito Mukherjee

New Zealand's dairy farmers are under stress and battling many challenging conditions. Faced with lack of rains and curbs on irrigation, they are also facing slide in milk prices, which already dropped by a third, making supplementary feed unaffordable to many farmers.

Federated Farmers of New Zealand's dairy industry group chairman, Andrew Hoggard threw more light into the distress faced by the farmers and said the country is teetering on the edge of a drought.

"Drought hasn't officially been declared anywhere in New Zealand yet, but it is pretty bloody dry across most of the country really," according to a report in Weather Zone. The impact is that a lot of them are moving quite quickly onto water restrictions for irrigation and are not able to grow the normal amount of grass they require, which effectively means they are going to lose production, he added.

Drop in Production

Hoggard said this is causing a drop in milk production countrywide, though he was not clear what percentage fall there would be. "I would expect milk production to be back this year. It won't make sense to push too hard to get extra production this year."

Hoggard, a North island dairy farmer, said the price for most farmers dropped to $4.70 per kilogram of milk solids. "Started of the season at $7, then revised down to $6, then $5.30 and now we've dropped again, so hopefully this is the end of it, because it hasn't been down at that level for at least over a decade, I think," Hoggard said.

New Zealand has a vibrant dairy industry, which is highly export centric with only about 5 percent of production being consumed locally. Multinational dairy giant Fonterra collects 90 percent of New Zealand's total milk supply. Then the milk is processed into commodities, such as whole milk and skim milk powder, and sold globally.

According to Dairy Australia industry analyst John Droppert, the looming drought in New Zealand will lead to a commodity price recovery in Australia. He said it is undeniable that what happens in the New Zealand dairy industry will have an impact on prices.

Oil Price Impact

Falling oil prices in many oil producing countries are also dampening the appetite for New Zealand’s dairy products and lamb. Economists say some oil-producing countries particularly those in the Middle East have been important markets for New Zealand's dairy exports.

The crashing oil prices are also dampening the chances of a commodity dairy price recovery in the first half of the year, as suggested by the recent Fonterra's Global Dairy Trade auctions, reports Stuff.Co.Nz. The exporters are worried that the oil price collapse is robbing many of them the small economic comfort they are getting from commodity exports under the weakened New Zealand dollar vis-à-vis the U.S. dollar.

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