• Finance Minister agrees $2.40/kg payout would be "disastrous"; says RBNZ and Govt in talks with banks to 'go easy' on farmers

    By Bernard Hickey

    Finance Minister Bill English has admitted the Government and Reserve Bank are in discussions with banks to ensure they don't prematurely force dairy farmers into mortgagee sales that could trigger a dangerous spiral lower in land values.

    English's comments came after a report that a bank was forcing dairy farms into the arms of receivers in South Canterbury, although the report did not give details of the bank or the farms involved.

    He told reporters in Parliament the longer term view was that consumer demand in China for dairy products was strong despite the recent stock market slump, "but in the short term it might be a bit softer."

    He agreed a payout of as low as NZ$2.40/kg, which was one scenario suggested last week by BNZ, would be disastrous.

    English was then asked if the Government was talking to banks to 'go easy' on indebted dairy farmers.

    "It's a topic that we've been discussing and the Reserve Bank is certainly discussing it because of their interest in financial stability," English said.

    "So they'll be looking with the banks fairly closely into just where the dairy debt lies. And it's a relatively small number of dairy farms that have high levels of debt. So the indications are the banks are certainly going to be helping fund a lot of farmers through this next season because their cost of production could be higher than their revenue," he said.

    "And then there will be a minority for whom there is some real pressure, because they were over-extended on debt."

    English said banks had been careful in the last downturn in 2008 and 2009 "because they understand that if they push too hard they could create a broader problem by pushing land prices down if they try to sell too many farms."

    "All the indications are they understand the scale of the problem and they are going to be pretty considered in how they deal with it," he said.

    Key confident of long term for dairy

    Prime Minister John Key was more upbeat on the outlook for dairy.

    He said Fonterra's expectation was that dairy prices may come down "a little bit more."

    "But overall I still stand by the way that you will continue to see exchange rate adjustments if that's the case, but the long-term outlook's pretty strong," he said.

    "At the highs and lows it always seems pretty extreme - the question is what do the long-term fundamentals look like and generally they still look pretty good for dairy.

  • Andrew Little says Labour opposes TPP unless it allows future Governments to ban foreign buyers of land and houses

    By Bernard Hickey

    The Labour Opposition has opened a new front in its drive to ban foreign buyers of land and houses, saying it would oppose the Trans Pacific Partnership Agreement (TPP) unless it allowed future Governments to ban such sales.

    Labour Leader Andrew Little detailed Labour's tougher policy on the TPP on Tuesday after Prime Minister John Key said the TPP would effectively stop any future Government from banning non-residents from buying New Zealand land and houses.

    Key has said New Zealand's 2008 Free Trade Agreement (FTA) with China included a Most Favoured Nation clause which meant China was entitled to the same treatment as other nations in any future free trade deal. New Zealand's FTA with Korea, which has been signed and is being finalised, prohibits any ban on foreign buying, meaning China has to be treated the same. Key has also said the TPP, which is in the final stages of negotiation in Hawaii this week, would also prevent any ban.

    Little said the Government was being disloyal by refusing to protect New Zealand's sovereignty and was betraying the nation's long-term interest by locking future Government into such a deal.

    "The Government must have the right to restrict the role of non-resident foreigners when it comes to our property market, whether it's residential or farm land. We must have the right to set our own rules to act in our interest." Little told reporters.

    "We don't know what's in the TPP. The whole thing is secret which is why Labour has put some bottom lines there, including protecting the right of future governments to legislate in the best interests of New Zealand, including putting restrictions or bans on what non-resident foreigners can do in terms of land sales," he said.

    Labour's other 'bottom lines' included the protection of Pharmac, stopping foreign corporates from successfully suing the Government and ensuring meaningful gains in market access were achieved.

    "We cannot have the situation where the Government is at risk of legal action because of its attempts to legislate in the best interests of New Zealanders," he said.

    "If it compromises or prevents the ability of any future government to restrict land sales, residential or farm, we will be opposed to the TPP."

    However, Little would not commit to repealing or changing the TPP if Labour was the Government, saying only it would have to make it's decision at the time, given it did not know what was in the TPP.

    "I don't know what the scope would be for a future government to do with a concluded agreement," he said, adding however the full agreement will not be voted on in Parliament. There may be enabling legislation that will have to be voted on.

    "We will oppose the TPP in whatever form we can if it prevents a future Government from acting in the best interests of New Zealanders," he said.

    Little said the primary concern about the TPP it had received in feedback from voters was the risk or threat of preventing a future Government from restricting land sales.

    "That's what they fear most. The Government should hear that message. That's why we've taken the stance we have," he said.

    He said the Government should renegotiate its bilateral with Korea if it prevented a ban on foreign buyers.

    Key admits Pharmac costs may rise

    Meanwhile, Key told reporters the TPP could extend the patents on medications, preventing Pharmac from quickly using generic versions, but that these costs would be more than offset by gains through increased market access.

    "Patents will run for a little bit longer and that means the government will have to pay for the original drug as opposed to the generic for a little bit longer," Key said.

    "For consumers that won't make any difference because for subsidised drugs you pay $5 for your prescription. So the government may incur slightly more costs there but then the government has to say what are the benefits that we get? Of course, if we have a lot more exports and a lot more economic activity we gain a lot more revenue there," he said.

    "There's always a bit of give and take, but overall it's at the margins and the modelling  we've seen presents more benefits than costs to us."

    Doctors have estimated the TPP could increase drug costs by NZ$25 million to NZ$50 million a year.

    Little said the Government appeared to be going back on its commitment to retaining the benefits of Pharmac.

    "A couple of months ago they were saying they were going to protect the Pharmac model and they're going back on that undertaking. That's the whole problem with a negotiation done in secret," Little said.

    "If they now want to load up more cost on the New Zealand taxpayer to meet the cost of Pharmac, that's not acceptable."

    Little denied Labour had reversed its earlier commitments to free trade.

    "We remain absolutely committed to free trade. We're a small trading nation and market access remains absolutely vital, but the TPP does more than market access. We don't even know what market access it's going to achieve, but it does way more than market access and that's the problem with it," he said.

    "We listen to all New Zealanders and we listen to a lot of New Zealanders who are concerned about the potential threat to the future sovereignty of New Zealand Governments."

  • The Sheep Deer and Cattle Report: Wet winter tightens feed supplies for early lambs in the North Island


    More small chilled lamb schedule price lifts this week, but little change to the gloomy Chinese and UK markets for NZ product, although one processor has suggested lower numbers will increase demand for Christmas orders, and the recent currency's fall against the pound, the euro, and US dollar have been helpful.

    Economic conditions in China with it's shaky sharemarket, and in Europe with fears the Greek situation could spread to other countries, coupled with good domestic production in the UK and China, are major handbrakes to a rapid turn around of confidence for the lamb export sector.

    Lambs are arriving in lower altitude farms of the North Island onto wet soils and low pasture covers, as managers look for an early spring to kick start growth, and grow animals to be ready for harvest before the predicted dry El Nino conditions kick in.

    In areas that were not affected by the dry, scannng percentages have been above average, and fears build that lack of feed at lambing could affect survival rates.

    Sheep farmers have successfully supplemented their incomes in the past few years with dairy support and the downturn in that sector will hurt profits and could push beef store stock demand higher than it should be.

    Silver Fern Farms Alpine merino hogget contract has been priced at $6/kg to continue this creative marketing campaign and reaffirm the importance of this income option for high country farmers.

    More signs this week that Silver Fern Farms are close to confirming their capital raising initiatives as they suspend trading on its shares and also announce they are selling their share in a rendering plant in the South Island.

    Both co-op shareholders have achieved the numbers for a special general meeting to discuss merger proposals, but directors remind reformists this will be no directive for change.

    In-lamb ewes are appearing at saleyards but most are only making about $100/hd, as most sheep farmers take a conservative view on future prospects, although at Temuka in a small yarding of 3000, many good ewes with high scanning percentages sold at $140-$150 a head.


    A small North Island auction for mainly early shorn and second shear wools was fully firm on recent values, helped by the lower currency, but low volumes masked the present weak demand out of China and Europe.

    Early mid micron indicators show prices that are well ahead of last years levels and it is hoped that these levels will flow over to merino's finer fibres which last year returned disappointing returns.


    More big beef price rises as global shortages drive demand, and store and prime animals in saleyards have now breached the $3/kg lwt barrier, as farmers with feed chase animals with early finishing potential.

    Reports from the US reveal their dairy farmers are also rearing their surplus calves for dairy beef, which will eat into a market NZ producers once claimed as their own.

    With such a long lead time to finishing for young animals caution is being urged on prices paid, as early signs are already being seen by consumers who are resistant to the very high prices for the product.


    Some small venison schedule lifts this week as positive demand and a more favourable currency, starts the chilled harvest season.

    Industry leaders report they are looking to add further value to the lower priced cuts as the higher end premium is close to an optimum in competition with other proteins.

    Early August sees the casting of buttons by stags and heralds the start of the new velvet growing season, and growers will be hoping for more of the same for this specialist activity that has recently yielded some of the best per hectare returns of any livestock operation.


  • Will the better results improve the likelihood the two big meat co-ops can finally find a way to merge, asks Allan Barber

    By Allan Barber*

    A note to shareholders last week updated the company’s position after 9 months and predicted a substantial improvement on last year.

    Gains have occurred across the board with sales up 8.6% or $150 million, debt $100 million lower and improved inventory turnover.

    This enables Silver Fern Farms to forecast EBITDA of between $75-80 million for the year ending 30th September. This is quite a bit better than last year’s $39.3 million EBIT which was $68 million on a comparable basis, although there should be even more improvement at the NPAT level because of reduced interest costs and the need to provide for redundancy costs in 2014.

    After allowing for depreciation EBIT should be around $45-50 million with a further $30 million of finance costs which would produce a net profit before tax of $15-20 million.

    This would be significantly better than results in recent years and may be good enough to provide a return of 5% on net assets. Last year’s after tax profit was less than $500,000 which admittedly was a big improvement on the $28.6 million loss in 2013.

    On the face of it the country’s biggest meat processor is in a much better state than at any time in the last five years in spite of the declining sheep numbers leading to fewer lambs for slaughter. It appears the operational decisions to close inefficient capacity and rebuild Te Aroha, as well as shedding ownership of co-product facilities, have all started to pay off.

    The big question is whether this level of performance improvement is sustainable in the future against a backdrop of falling sheep numbers, fewer prime cattle and rising cull cow numbers, with prospects boosted by a lower New Zealand dollar. Market conditions are uncertain, particularly in Europe and China, although the outlook for beef is positive.

    Shareholders of both SFF and Alliance are unhappy about the failure to give serious consideration to a merger as a means of reducing costs and improving farmers’ returns and are unlikely to view one good year for their meat processor as an indication of future farm profitability.

    Each cooperative will now be required to hold a special general meeting to vote on a resolution which, if passed, seeks to require the directors to provide an analysis of the potential benefits and risks of a merger as well as an independently verified risk mitigation plan. However Alliance chairman Murray Taggart makes the point such a resolution would not be binding on the directors.

    In the past both cooperatives have considered the benefits of a merger, although Alliance has steadfastly maintained the weakness of SFF’s balance sheet makes such a proposal uninteresting. It will be interesting to see whether SFF’s performance improvement provides sufficient justification for reconsideration, although Taggart says in a press release Alliance is working on six key priorities for improving returns to its shareholders.

    He also maintains the benefits of a merger estimated by consultants GHD and published in MIE’s report Pathways to Long-term Sustainability are unrealistic. It is becoming increasingly possible the combination of livestock population and SFF’s improved balance sheet may offer enough benefits for a merger to be an attractive option. The results of SFF’s capital raising exercise will be announced in August which will provide another important element for both company and its shareholders to take into account.

    There is still a fair amount of water to flow under the bridge before we will see a clear picture of the future shape of the meat industry, but it is encouraging to see better performance after several years of pain. Farmers will be hoping this bodes well for their on-farm profitability as well.

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    Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at or read his blog here ». This article first appeared in Farmers Weekly. It is here with permission.

  • MBIE says time to review how you manage 'critical risks', those serious enough to keep someone off work

    The new health and safety reforms are generating some angst, among both unions and businesses.

    The aim of the law is to reduce the number of New Zealanders killed or hurt at work. In New Zealand on average 73 people die on the job each year and one in ten is harmed in some way according to the ACC claim records.

    The new laws which will come into effect later this year don't mean your business will necessarily face a lot of new compliance costs. For many small businesses, little will change says the Government – especially if you already take a considered approach about how to keep those in your workplace safe and healthy.

    So ahead of the law change, it’s a good opportunity to review and, if needed, revise how you manage any critical risks – those that could cause illness or injury serious enough to keep someone off work.

    The new law says you need to take reasonably practical steps to manage these risks. How you do this will depend on:

    - how seriously someone could get hurt

    - the chance of an accident happening

    - and how much control you have over preventing it.

    Like all health and safety regulation, employers must look into the future for potential risks. And if one happens, you won't be able to escape the lawyers position that "you either knew or you should have known". The regulators and courts will have the certainty of hindsight.

    MBIE has published a list of 'myth busters' about their new changes to the law.

    Myth one: The new health and safety (H&S) law won’t apply to small businesses.


    It applies to all businesses in New Zealand, regardless of size. But it doesn’t necessarily mean that your business will need to do anything differently, if you already take a considered approach to H&S.

    Myth two: Paper cuts are now a big deal


    The new law emphasises proportionality. What you need to do will depend on the level of risk and what you can reasonably control. What you need to identify, and take practical steps to manage, are critical risks to the people in your workplace – including visitors and customers. These can range from noise levels to slippery floors, heavy machinery to hazardous substances.

    Myth three: It’ll be expensive to comply.


    The most important thing to do costs nothing. Talk with your employees about how to work safely. Expert advisors may be useful if the risks you need to manage are detailed and technical – see these tips on choosing the right advisor if this applies to your business. You can also contact WorkSafe for advice.

    Myth four: I need to do something now, or face big fines.


    High penalties only come into play for employers who recklessly or persistently flout safety management steps. If you already have sound H&S policies and practices in place, you’re in a good position to stay compliant when the law changes. If not, there’s plenty of time to fix this – and keep those in your workplace safe and healthy.

    Myth five: If someone gets hurt, I’ll go to prison.


    Again, penalties such as hefty fines and imprisonment are only imposed in extreme circumstances. For example, if an employer removes safety measures put in place after a WorkSafe inspection, and a worker is seriously injured as a result. In general, WorkSafe aims to support those who show a genuine willingness to comply.

    Myth six: This means LOADS of paperwork.


    Paperwork does not equal managing risk, and managing risk does not equal paperwork. You only need documents if this is the best way to manage and minimise critical risks. Putting things in writing is a useful tool for good communication, but what’s most important is for you and your employees to discuss safety management.

  • "Progress" in capital raising sees suspension of Co-op's shares

    The following note was received from Silver Fern Farms:

    The Board of Silver Fern Farms has elected to suspend trading in its shares on Unlisted until further notice, as it continues to progress its capital raising initiatives.

    No further comment will be made at this time.

  • Peter Weblin assesses the consequences of harvesting the large forest plantings of 20+ years ago and the implications facing forest owners

    By Peter Weblin*

    During the 1990s forestry investment was at an all-time high in New Zealand.

    This was stimulated by a price spike in 1993 which saw log prices reach an historic record high in the third quarter of 1993.

    Export A-grade peaked at $370/m3 delivered to wharf gate (NZ port).

    Source: MPI

    From 1992 to 1999 there was an average of 65,000 hectares per year of new commercial forest planting. In 1994 new planting levels peaked at 98,000 hectares. Radiata pine forestry was the new “green gold” with the associated talk of riches and a “paradigm” shift in the markets.

    What has transpired in the market since is radically different from most of the expectations of those that participated in the planting boom and financial returns from well-managed forests have gravitated to be more in line with other comparable land uses.

    Twenty three years on from the start of the planting boom, these forests are nearing maturity. The chart below shows one scenario of the potential wood availability. A key characteristic of the massive increase in wood availability is that it is entirely from the smaller (less than 1,000 hectare) forest owners.

    Source: MPI

    The actual increase in harvested volumes won’t look like this chart. This is partly because the chart is based on harvesting at age 30, whereas the average harvesting age is actually several years younger than that, especially when the log market is strong.

    The increase will also be constrained by logging, transport and port capacity. PF Olsen conservatively estimates that 300 additional harvesting crews and 900 additional logging trucks will be required to tackle the projected volumes. Most of the volume will have to be exported unless there are significant expansions in domestic processing. This is expected to double the current volumes going through New Zealand’s log export ports. With these constraints, it is unlikely that harvest volumes will be able to increase any more than 20% year-on-year.

    The profile of these large areas of maturing forests are:

    • Smaller blocks. An estimated 80-90% of the owners have forests less than 100 hectares.
    • Greater distance to domestic processors and ports – higher log transport costs.
    • Steeper (more hilly) terrain and higher logging costs.
    • More rigorous environmental and safety compliance based on revised legislation relating to principal’s duties and higher societal expectations.
    • As a result of the above, relatively lower stumpages (net return to the forest owner). Lower stumpages are much more sensitive to log price swings. For example, a $10 log price increase means a 50% increase in a $20 stumpage, but only a 20% increase in a $50 stumpage.
    • Higher volatility in harvesting volumes based on more market-sensitive stumpages (above) and shorter harvesting time-frames. Smaller blocks are exposed to the market for shorter periods. Smaller forest owners are, therefore, more likely to suspend harvesting during market downturns.

    There will be increased tension between forest owners wanting to avoid selling logs in a down market and harvesting contractors needing steady work to maintain financial viability and skilled workers. While this tension exists today, it will be much more significant in the future as harvesting shifts from predominantly larger forests to predominantly much smaller blocks.

    Large areas planted in Radiata pine forests in the 1990s are approaching maturity with significant implications for the sector.

    The other big question is whether the markets can take the volume.

    Announcements of large increases in capacity at Red Stag and Lumbercube will make a material difference in log demand in the Rotorua area, but have little impact elsewhere. Other areas will likely have to rely almost entirely on increased log exports. Our current log markets have the potential to easily absorb the increased volume, so long as the key purchasing countries’ economies continue their current strong growth.

    Competition of supply from other sources is not expected to be too big an issue especially if the current momentum to reduce illegal harvesting around the world continues. However, when the above are unfavourable, New Zealand’s increased harvesting volumes do have the potential to weigh heavily on a soft market.

    Implications for the sector

    The above context is expected to result in the following trends:

    • Rationalisation – aggregation of the larger forest blocks into single ownership entities (usually specialist timber investors).
    • Attempts to form harvesting cooperatives/clubs to provide more efficient working programmes, more work stability and better log marketing. Such arrangements, however, have had low uptake in the past mainly due to individual forest owners all believing that they can time their harvesting for the peak of the market (despite the physical impossibility).
    • Increased challenges for harvesting-related contractors, mainly in the form of attracting and retaining safe and skilled workers and high debt levels with volatile work programmes.
    • Congestion at those log export ports that have made insufficient investment in infrastructure to handle the increased volumes.
    • Greater benefits from getting Harvest-Ready early. This includes mapping, developing an inventory of the timber in the block and harvest planning.
    • Widespread disappointment amongst forest owners who take an opportunistic approach to harvesting and try to time the market, but get left with no harvesting capacity or the high risk of using unsafe and low-quality contractors.
    • A higher level of sales of near mature/mature forests (and land) as owners opt for an easier sales option and earlier cashflow. This options can also take away the residual land issue after harvesting. 


    This article is reproduced from PF Olsen's Wood Matters, with permission.

  • Peter Weblin says improved July prices are mostly because the exchange rate moved favourably. High Chinese stocks are lingering, but demand in India is improving

    By Peter Weblin*

    Export log prices continued to recover in July, increasing around $6/JAS m3. On average domestic pruned log prices increased $3/tonne, structural log prices decreased $1/tonne and pulp log prices were flat.

    In general, the market situation in July is little changed from that in June.

    See our separate story where we discuss the large harvesting volumes forecast over the next decade or so from forests planted in the 1990s. This huge increase in wood availability will have a significant consequences for forest owners in terms of the log market and procurement of logging, engineering and log transport capacity.

    Export Log Market

    The Chinese log market hasn’t changed much since last month’s report. High log stocks in China are struggling to reduce much below 4 million m3 and CFR price is struggling to recover. The July increase in the New Zealand at wharf gate price was largely driven by the falling NZ$:US$ cross rate which was above 0.685 in June, fell to 0.675 at the beginning of July and is currently around 0.655.

    The recovery in the housing market in China is not yet flowing through to sufficient new construction projects to clear the high log stocks and is being hampered by excess housing stock in second and third tier cities.

    The Indian market is improving with higher CFR pricing offsetting the higher ocean freight rates to India. Currently the India market is offering higher New Zealand at wharf gate prices, but this can change quickly as this relatively small softwood log market can weaken quickly if over-supplied.

    Ocean Freight for Logs

    Affinity Shipbrokers’ Baltic Exchange Handysize Index has increased from 345 mid-June to 417 mid-July, an increase of 17%. Bunkers (fuel oil for log ships) on the other hand has been trending down again (see chart below) and, since bunkers comprise a significant proportion of total ocean freight costs, this is offsetting the impact of the increased charter rates. On balance, shippers are reporting a slight firming in ocean freight rates for logs, but still in the low USD 20-25/JAS m3.

    Source: Affinity Shipbrokers

    Domestic Log Market

    Declining New Zealand GDP growth and an oversupply of structural lumber led to a slight easing in structural log prices in July. This is not considered a change in the general strength of this market segment based on continued strong new house construction levels.

    The pruned log market remained strong with an average $3/tonne price increase. The current premium for pruned logs (over unpruned logs) is now $70 and could well increase. Forest owners should note that this premium makes pruning financially viable in most situations (and very worthwhile on certain sites).

    The PF Olsen log price index rose three points from $99 last month to $102 this month. It is now $17 higher than its cyclical low of $85 in November 2011 and $4 below the two-year average and $1 above the five-year average.

    PF Olsen Log Price Index to July 2015

    Basis of Index: This Index is based on prices in the table below weighted in proportions that represent a broad average of log grades produced from a typical pruned forest with an approximate mix of 40% domestic and 60% export supply.

    Indicative Average Current Log Prices

    Log Grade $/tonne at mill $/JAS m3 at wharf
      Jul-15 Jun-15 May-15 Apr-15 Mar-15 Jul15 Jun-15 May-15 Apr--15 Mar-15
    Pruned (P40) 170 168 169 162 152 165 157 157 167 168
    Structural (S30) 103 104 105 108 111          
    Structural (S20) 93 94 94 95 97          
    Export A           96 90 92 92 110
    Export K           90 84 85 85 104
    Export KI           84 75 80 80 104
    Pulp 50 50 50 50 50          

    Note: Actual prices will vary according to regional supply/demand balances, varying cost structures and grade variation. These prices should be used as a guide only and specific advice sought for individual forests.


    This article is reproduced from PF Olsen's Wood Matters, with permission.

  • BNZ economists now see $3.80 milk price for current season but do believe global dairy prices will start to recover late this year

    BNZ's economists have taken the scalpel to their forecast milk price for farmers for the second time in a week, cutting their prediction to $3.80 per kilogram of milk solids from $4.30.

    The economists previously cut their forecast from $4.70 just last week in response to a disastrous GlobalDairyTrade auction, in which prices fell 10.7% - the ninth consecutive fall and the biggest drop in over 12 months. Prices are now at 13-year lows.

    The new forecast from the BNZ, which does incorporate some expected recovery in prices globally late this year, brings it into line at the bottom end of predictions with the ANZ ($3.75 to $4)

    Fonterra's opening forecast for the season is $5.25, with the next scheduled opportunity to review it being the board meeting on August 7. There is speculation in the marketplace, however, that it may well be reviewed before that.

    BNZ senior economist Doug Steel said the BNZ's new $3.80 figure represented "our best estimate of the middle of a very wide range of potential outcomes when the season’s figures are finalised in over 12 months’ time".

    The forecast was underpinned by wholemilk powder (WMP) prices remaining weak in the near term before approaching US$2,500/T by mid-next year.

    Steel said given the considerable uncertainty at present, it was useful to look at alternative scenarios based on WMP and what these might mean for the 2015/16 milk price. "In addition to our forecast, we look at three alternatives: no change from here, a downside scenario and an upside scenario."

    The chart below shows these WMP price scenarios and the associated indicative 2015/16 milk price. It is also gives an indicative start point to the 2016/17 season if prices evolve as defined under these scenarios (along with other assumptions) to the start of that season.

    These are the three scenarios the BNZ economists outline:

    No-change-from-here scenario

    This scenario assumes prices remain at the mid-July auction’s level for the entire season (as if world prices would ever sit still for a year!). Given the other uncertainties including the exchange rate, we estimate this would give a 2015/16 milk price in a range of $3.00 to $3.50.

    Downside scenario

    This scenario assumes further declines in WMP prices to US$1,500 in the near term and no recovery over the season. Such a scenario may involve an economic stumble in China denting dairy demand, lower oil prices, a further extension of the Russian trade ban, large EU production post-quota removal, weak underlying prices engaging EU intervention buying that delays price recovery, strong US milk production via lower grain prices, and/or favourable weather. The NZD would be expected to decline further under such conditions, but even so and given the other uncertainties, such an international situation would give a 2015/16 milk price in a range of $2.40 to $2.80.

    Upside scenario

    This scenario assumes price stabilisation initially and then solid gains in WMP to US$3,500 by the middle of next year. Such a scenario may involve some combination of a prompt and large return of buying from China, strong lift in oil and grain prices, a severe El Nino denting milk production, removal of the Russian trade ban, or major weather event in a major milk producing area. The NZD would be expected to be firm under such conditions, but even so and given the other uncertainties, we estimate this would give a 2015/16 milk price in a range of $4.50 to $5.00.

    Steel said while the latter scenario may seem unlikely given current weak conditions, "we note that in the three dairy price cycles within the past 10 years WMP prices have essentially doubled within a 12 month period".

    "Is it darkest before the dawn at present?"

    Steel said BNZ's economist are expecting Fonterra to make a downward revision to its forecast milk price.

    "How much depends on many factors, including the co-op’s view on where dairy prices track over the coming 12 months. One thing is for sure. There is plenty to consider."

  • The Weekly Dairy Report: Cows begin milking in the north as too much of last years product is unsold

    July weather continues to put pressure on feed as managers carefully ration supplies as they plan toward calving, but lower than average soil temperatures slow growth on saved calving pastures.

    Whilst many are locked into this years feeding systems, advisers suggest feed should be no more than 5% of total farm costs as budgets and stocking rates are meticulously reviewed, and the price of feed grains and pke are falling steadily.

    Northern herds have plenty of calves on the ground now as their season starts, but will be very concerned of reports of last years dairy commodity stocks carried over, both here in NZ and powder stockpiles in China.

    Many are having to supplement milking cows with palm kernel, maize, and silage to maximise production, but most are planning to grow their own feed this year, and have reduced stocking rates to achieve this.

    Last weeks auction result was described as disastrous on another 10% fall, driven by an even bigger drop for whole milk powder, and the ANZ dropped its forecast to $3.75-$4.00/kg ms, and the BNZ to $3.80.

    Open Country Cheese also reacted pessimistically with a $3.65-$3.95 figure that illustrates just how far the fall has gone.

    The currency did fall on the back of this poor auction, and economists predict further falls in interest rates, as more debt may be the only solution in the short term.

    All eyes will be on Fonterra’s 7th August announcement of the advanced rate which will show the markets true position, and determine the extent of the overdraft pressures for the coming season.

    Dairy farmers are being urged to use beef genes for non breeding cows to cash in on strong demand for beef, and increase returns from this byproduct of milking.

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