As the slowdown becomes a shutdown and bailout programs kick in, Guy Trafford takes a close look at the signals reaching the farm gate and tries to make sense of them

The latest Global Dairy Trade result was as expected, down. However, the results on the product mixes was somewhat unusual.

Overall, the drop was -3.9% but within the mix cheddar rose by +2.6% and butter +0.3%. That then left the powders to drag the price down. Skim milk powder fell -8.1% and whole milk powder -4.2%. These are the two main drivers of farm gate prices and so the fall here while not going to influence this seasons prices greatly, may be the start of a detrimental impact upon next seasons farm gate price.

Second guessing the results one could believe that the influence of Covid-19 is working both ways. In previous recessions fast food outlets reported an upturn in sales as people avoided restaurants and instead opted for a pizza or hamburger for a meal. This already is being magnified with in some EU countries and parts of the US restaurants being closed except for takeaway meals. So that may account for the lift in cheddar sales.

Butter is more difficult to place but possibly has benefited from some of the same influences.

The milk powder prices, both SMP and WMP, are strongly influenced by China. Given we have been hearing that the giant is waking up there was a hope that these prices may have held at a higher level and it was in the previous GDT auction that the hit may have been felt. Perhaps their stocks are at satisfactory levels negating the need for greater demand purchasing. Whatever the cause, China is also going to feel the economic effects of the rest of the globe going into a recession and this must reduce their demand and ability to pay into the future.

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Fonterra have tried to shore up their cash flow and financial position by apparently drawing down the $7 bln overdraft facility they have available with their bankers. They are no doubt, working on the basis that it is better in their coffers than the banks, especially with the record low bank interest rates they will be paying on it. This should ensure they are able to meet all their financial obligations for the foreseeable future. (The only concern I have is that they have left enough in the banks’ coffers for the rest of us!)

The Government announcement earlier this week regarding the injecting of over $12 bln into the economy as a means of “limiting the damage to a recession rather than a depression” certainly has done a lot to mollify the concerns of many small businesses and protect many jobs for the meantime. The twelve week period the wage support extends for may take us into a whole new paradigm. It would be nice to think that China may be over its issues with Covid-19 and we, providing New Zealand manages to contain and eradicate the odd outbreak, are in a position to begin some flights with them. Probably pie in the sky but at least we have some breathing space for staff.

One question ‘we’ had being a new business was the clause of comparing this year’s income with last years. We didn’t have our Riverside Market business last year and so couldn’t meet that. However, having just spoken with WINZ I feel more reassured that the intent is to help and the monthly totals drop is more the driving proof that WINZ need to provide the wage subsidy. We’ll feel happier when the money is in the bank but at this stage there are two staff still employed and I feel some relief. This whole Covid-19 event has a slightly surreal feel too it, not helped by the speed the events are unfolding. Nobody likes uncertainty and between markets, droughts and Covid-19 - plus Government responses to them - the place is buried in uncertainty. But slowly (in the context of these rapidly moving events) the pieces of the jigsaw are coming together although the picture they are forming is quite a different one to what we were looking at before the jigsaw got thrown up in the air four months ago.

It is perhaps unfortunate that Covid-19 has occurred in an election year (for both us and the US) as the opposition parties seem to feel an obligation to try and make political gains.  The situation for all is serious and it would be nicer in New Zealand case anyway if Parliament could work together on this rather than try to point-score. From my perspective it is not useful to the situation. In the meantime we will keep unloading livestock and we had our first frost of the season so it may be a cold winter ahead.

A positive footnote which has just come through is that Local Trade prices in the Northern Region and Local Trade Lamb in the North Island have had a small lift on their schedule which just came through. It has been a couple of months since we have had an up on pricing. No doubt driven by supply shortages, but up is still up. See here.