Dairy industry on the road to recovery
But there are still question marks over this season, reports Andrea Fox.
The dairy price recovery farmers have been desperate for seems to have arrived. Economists and industry watchers are unanimous that the improved global prices of the past six or so weeks look sustainable. Concerns are fading that the turnaround is a repeat of the false dawn of early last year when depressed prices rose and then dived sharply.
However it’s predicted the recovery will be low key, and commentators say the prognosis will be a lot clearer in November after New Zealand’s peak milk production period.
‘‘The currency is higher than exporters, including dairy farmers, want it to be but improving international prices are looking more durable by the day,’’ said ANZ economist Con Williams.
‘‘The recovery we’ve been waiting for is well and truly under way now,’’ was the verdict of Rabobank analyst Michael Harvey.
BNZ economist Doug Steel said contracting global supply in many key dairy production countries, including Europe, Australasia and Argentina, indicated there was ‘‘some fundamental underpinning’’ to the recent price lifts.
The optimism follows three solid increases in the average price on Global Dairy Trade auctions since late July. In the latest auction the index was up 7.7 per cent, at an average price of US$2920 per metric tonne.
More significantly, the average price of whole milk powder, New Zealand’s major dairy export and a determiner of Fonterra’s farmgate milk price, has jumped by 32.5 per cent over the past three auctions.
The contraction in milk production by overseas rivals is in response to the global milk price downturn.
But the new positivity comes with warnings.
Kiwi farmers responded to the three-year price drought with heavy culling of cows but the ANZ’S Williams said there was no guarantee national production would be down this season by as much as some predicted.
This could see the price improvement stall as overseas buyers realised in the next few months that New Zealand supply was not going to be down as much as anticipated.
‘‘It’s one thing that might hold the market. We might have a plateauing period coming up because I think new season milk supply out of New Zealand is going to be OK and not as soft as people are anticipating.
‘‘If you look at pasture growth and pasture covers in general in the major producing regions, it’s pretty good. Farmers are definitely focusing on producing the same amount of milk, if not more, from lower cow numbers. I think people are missing that.’’
The BNZ’S Steel said the demand side of the price equation was harder to read.
‘‘One of my worries would be that the increase over the last three auctions sort of started to generate its own demand with buyer fear of missing out and being caught short. That sort of demand can only extend so far and may cause some sort of overshoot in the near term.
‘‘That gives a chance of a pullback. Also there are expectations around the supply side in the next six to 12 months, particularly in the southern hemisphere but also into 2017 in Europe. I think market pricing is building in a reasonably heavy contraction in supply. If it doesn’t (happen) then prices may come back as well.’’
The BNZ was picking only a 2 per cent decline in New Zealand production this season. ‘‘It’s obviously very early days and very dependent on weather but it wasn’t so long ago we were hearing numbers as high as minus 10 per cent, which seemed a stretch to us but it certainly was a heavy cow cull.’’
Steel said there was also the risk the price improvement would encourage farmers to lift production again. Coupled with extremely low grain prices, the economics would improve ‘‘pretty quick’’ for northern hemisphere producers, he said.
‘‘So 2017 production, particularly in Europe but also in the States, might not turn out as weak as currently anticipated.’’
Rabobank’s Harvey was confident the price improvement was sustainable. Exporting dairy farmers were reacting to low milk prices. ‘‘There’s a real tightening in the market so that is what is going to drive a sustained recovery. It then becomes a question of how much (price) recovery you get in the next six months which are critical to the New Zealand industry because a lot of milk is going to be produced and sold.
‘‘So far there’s nothing to say it won’t continue but we don’t think it’s going to bounce dramatically because there are still some stockpile situations we are mindful of. In China demand is still below where we think it is going to recover to.
‘‘We expected a muted recovery over the next few months.’’
Williams said Fonterra’s recently upgraded milk price forecast of $4.75 was definitely sustainable.
‘‘If prices stick through to November or around then, you’re probably looking more at the mid$5s as opposed to the high $4s.’’
The ANZ’S own milk price forecast remains in the high $4s.
‘‘In the last auction we saw stronger demand out of the Middle East and Africa which surprised me a little because when prices moved higher we thought demand might dissipate. Milk fat is obviously a bit restricted in supply and New Zealand product was priced at quite a discount to Europe and the US product, so obviously they were looking for the cheapest source in the market.’’
The BNZ’S milk price forecast is $5.30.
‘‘It’s the middle ground of a very wide range of possible outcomes,’’ said Steel. ‘‘If history tells us anything, in the last decade whole milk powder has essentially doubled (in price) within 12 months. On the current run rate over the last few months that looks achievable. On the flipside, in the last two years we have seen very strong price gains very quickly turn around and go to extreme low levels.’’
Dairy farm losses look to be over and farmers are probably heading for breakeven this season,
The recovery we've been waiting for is well and truly under way now Rabobank analyst Michael Harvey
says a specialist dairy accountant.
Nigel Mcwilliam of Diprose Miller in the Waikato said the recent run of average price increases at Global Dairy Trade auctions had buoyed farmers’ spirits and feedback suggested many were now budgeting for a $5.25kg milk price by the end of next May.
This was also the budget mark Diprose Miller had adopted for its dairying clients.
Cashflow however was still ‘‘light’’ with Fonterra’s milk price forecast upgrade to $4.75 providing only another 10c per kilogram of milksolids, Mcwilliam said.
The $5.25 budget was conservative but the worst of the milk price downturn seemed behind farmers now, though the Kiwi dollar was 10c too high, he said. There were opportunities to review farm ownership structures and succession planning.