Guy Trafford sees a healthy dairy trade as central to getting our economy back on its feet and the latest GDT auction suggests that element is a positive possibility

Guy Trafford sees a healthy dairy trade as central to getting our economy back on its feet and the latest GDT auction suggests that element is a positive possibility

It was good to wake up to find the Global Dairy Trade has not followed other primary industry sectors on the downhill slide with a +1.2% lift. After the previous auction’s drop the indications for this sale were not looking promising so any lift has to be welcomed.

This is the first lift in the overall weighted average since January 21st although different products have been moving around. The key product for New Zealand, whole milk powder (WMP), had a +2.1% lift.

Of the other three main monitored products butter has the greatest lift of +4.5%, cheddar cheese +0.2 % and only skim milk powder had a fall of -0.8%. After the four previous auctions ranged from -1.2%  to -4.2% there is still quite a bit of catching up to be done as the benchmark average price at US$2,969 is still below the US$3,000 which is considered to be the price New Zealand producers need it to be at to achieve viable farmgate prices.

However, given the current world situation prices are not in such a bad position especially when the $NZ value is factored in. It is likely the auction has been well supported by Chinese interests as they begin to restock as their logistics get on top of the backlog that had built up at ports and warehouses.

While the covid-19 influence is going to put a damper on next season it is not yet being shown in the various banks forecasts with most of the banks outlooks close to what they are predicting for this season. Of all the banks Rabobank stands out still sticking to its $7.60 for this season. Update: Rabobank changed its payout forecast to $7.35 in Mid March. But given they are also forecasting a 19% drop in wet milk equivalents for China, if this transpires it will make achieving the forecasted prices difficult. However, it is early days yet.

On the global scene both the EU and the USA are looking to have approx. 1.1% lifts in production for the last three months compared to last year, while Australia and New Zealand are down, Australia by -0.8% for the last three months and here in New Zealand for the whole season we are looking at a drop of between -0.8% and -1%.

The fate of what farmers end up receiving in all sectors is going to be greatly influenced by how the NZ$ performs. The trough this season to date has been 56 US cents for NZ$1. Rabobank have predicted a trough of 54 US cents in the third quarter before a currency recovery begins. The dollar is currently sitting at 59.85 US cents. Given the economy is going to be in some form of retrenchment for at least the next year a 54 US cent dollar is likely to be welcomed.

Primary sector exports are going to be crucial in getting New Zealand through this next year or two and imports which will be adversely affected by the low dollar are likely to be secondary to the benefits received by exporters.

Given the low price of oil and there is likely to be a reduction in world demand of fertiliser, thereby lowering the price of major inputs, costs may not be dramatically affected. New cars and tractors however, are likely to be costing more.

The more critical area of concern is going to be around New Zealand’s debt repayments as the low dollar will mean more NZ$ are going to be required to pay back US$ borrowing. How that is going to impact upon the New Zealand economy I’ll leave to wiser heads, but I imagine it will be more of a ‘slow burn’ problem for the generations that come behind us, rather than an immediate problem. In the meantime today’s continuing reduction in new covid-12 cases is the best news we could have, and hopefully this continues.

Dairy prices

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8 Comments

Really hoping we get a healthy uplift of NZers working across our ag industry sectors as a result of this.

Looks like a 2 week quarantine will be applied to all imported labour - hence it becomes less feasible to chase those lower wages. The government in thinking about this issue should to my mind remove the benefit claw backs altogether for those taking up casual seasonal work in the horticulture industry. Staff shortage problem solved.

I'd like to hear some informed comment on what this means for our balance of payments. With exports holding up well and imports facing difficulties (don't know why), will NZ inc. do well out of this? (or at least comparatively well).

As far as I know, yes perhaps out of date, the larger percent of Fonterra’s exports remain as commodity. That bodes well actually as it is of more simple and economic process and durable shelf life. Consumer spending power for the more glamorous high end retail product will have waned, like it or not. Back to basics X volume, safe food and protein are hard to beat.

Commodities seem to thrive in downturns like they did in 2008. Ferraris and Rolex - not so much

I would suggest to go hard export to China, increase pricing but less import from them, build more resiliency into our local productivity. We sway away from this FIRE economy trumpeted by Neo-liberal. But, honestly like what the heading imply ..positive 'possibility'.. I'm still expecting those Americans waking up patriotism again.. as they're into modern Pearl Harbour moment again right now, number of victims rising..watch 2021..world nations economics into sneezing & coughing banter at each others.. germ droplets all around the place.

Our third largest export earner is shut down while US/Oz supplies our markets. An industry that is outdoors under virus killing UV light, fully mechanised from stump to ship, works under a two tree length rule and communicates via radio. Export apples and pack houses fine - logs far too risky? Or logs just too un PC?

Rabobank are forecasting a much leaner 20/21 season at $5.60, due to less demand from China, and oil producing middle east. Fonterra April fixed milk price is 6.42 for 7.5 million solids. Seems optimistic relative to Rabos forecast. The value in the fixed milk price for Fonterra is providing customers who want it, price certainty. I'll be asking my shareholders councillor (for what it's worth) how they monitor transparency around fixed milk price, and the standard price, as wouldn't like to think those that don't want to speculate are subsidising those that do.