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Price falls in latest Fonterra dairy auction to see 'loppers taken to budgets and discretionary spending'

Rural News
Price falls in latest Fonterra dairy auction to see 'loppers taken to budgets and discretionary spending'
<a href="http://www.shutterstock.com/">Image sourced from Shutterstock.com</a>

ASB's economists have cut their 2014/15 Fonterra milk price forecast by 40 cents to $5.80 per kg of milk solids following falling prices in Fonterra's latest globaldairytrade auction.

Dairy prices have fallen in 11 of the last 13 fortnightly auctions. The latest auction saw an overall fall of 8.4% in US dollar terms with Whole Milk Powder (WMP) prices down 11.5%, and Skim Milk Powder dropping 6.5%. Since February 4 the US dollar dairy price index is down 41%, with the drop in New Zealand dollar terms 43%.

"We have cut our milk price forecast for the 2014/15 season to $5.80 per kg of milk solids. This revision is a 40 cent cut from our previous forecast of $6.20/kg. Our $5.80 forecast is also lower than Fonterra’s forecast of $6.00/kg, which Fonterra updated last week," ASB chief economist Nick Tuffley and rural economist Nathan Penny say.

"This reduction is another clear warning shot across farmers’ bows. If prices stay near their current low levels for an extended period, the risk of a milk price closer to $5.00/kg for 2014/15 season is rising."

"However, we still expect dairy prices to lift from current lows by the end of 2014. Production gains, owing both to better weather and the impetus from previously high prices, will wane, tightening global dairy supply. In addition, Chinese dairy stockpiles will clear. On this basis, we expect the downward pressure on prices to subside," ASB's economists say.

"The other supporting factor coming more and more into the view is the NZ dollar. While the NZ dollar is down from its highs last month, dairy prices and the NZ dollar remain out of alignment. As a result, we see a rising possibility of this gap closing over the season," Tuffley and Penny say. Here's their full report.

Just last week Fonterra reduced  its 2014-15 forecast Farmgate Milk Price by $1 to $6 per kilogramme of milk solids, and announced an estimated dividend range of 20 cents to 25 cents per share. This total forecast payout of up to $6.25 compares to $8.50, comprising $8.40 per kgMS and a dividend forecast of 10c, for the 2013-14 season.

ANZ economists say the ongoing price falls mean dairy prices are starting to enter the danger zone for many farmers, with budgets and discretionary spending likely to be cut.

 

"At overnight prices we estimate the milk price would be $4.90/kg MS. This well below the recent forecast update of $6.00/kg MS. Luckily year-to-date pricing is in the low $6/kg MS, but farmers will be budgeting accordingly, ie $5.50/kg MS. This is starting to enter the danger zone for many with rising interest rates and we expect the loppers will be taken to budgets and any discretionary spending. This will have wider flow on effects to the rest of NZ and especially many rural regions," ANZ says.

'Clear risk of a price below $6'

Westpac senior economist Anne Boniface says the latest drop in auction prices creates a "clear risk" the 2014/15 milk price payout will be below Westpac's current $6 forecast.

"We’d prefer to see another auction before formally cementing in a new forecast. There is still a lot of water to go under the bridge before the end of the 2014/15 season and as we’ve seen, commodity prices can be volatile in both directions," says Boniface.

"But the downside risks to this forecast are clear. The further dairy prices fall, the more difficult it is for prices to stage a rebound of the magnitude we have factored into our forecasts, particularly in the absence of usual catalysts such as drought, rocketing grain prices or some other disruption to the outlook for supply." See Boniface's full report here.

In May the Reserve Bank said nearly 70% of the $32 billion worth of dairy farm debt was on floating mortgage rates, meaning rising interest rates are likely to increase financial stress if incomes fall, which will happen if the payout drops. The Reserve Bank has increased the Official Cash Rate four times so far this year, by a total of 100 basis points, to 3.50% - sending floating mortgage rates higher - and is expected to continue increases through 2015.

ASB senior economist Chris Tennent-Brown recently suggested strong growth in bank deposits from the agriculture sector over the past year means there's a buffer in place to assist with falling dairy farm incomes. Bank deposits from the agriculture sector rose nearly 20%, or almost $1.5 billion, in the year to June to just under $7.4 billion.

No Chinese demand

ANZ says an absence of Chinese demand is the main reason for the large price falls in recent auctions. China was taking 55% to 60% of New Zealand’s milk powder exports at the peak earlier this year.

"Recent reports suggest it could be two to five months before they re-enter the market, so softness looks set to continue."

"Other recent notable developments have been weaker demand from the Middle East, geopolitical tension between Russia the second largest global importer and the West, as well as higher exportable production from key Northern Hemisphere markets. The plunge lower in prices looks very similar to the events in early-2009 and mid-2012. Price levels reached overnight for WMP are now approaching the levels reached during this period and are below the cost curve for all major exporters including NZ, so we are now starting to enter uncharted territory," ANZ says.

"Since 2006 dairy markets have been notoriously volatile, so let’s just hope the bounce back is as aggressive. For dairy farmers, the added conundrum is the high NZ dollar, with Fonterra’s hedging policy probably having largely locked them in for the 2014/15 season around US83 cents."

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25 Comments

($8.4 + $5.8)/2 = $7.1 per kgMS.

 

With my conservative guess of $5.8 per kgMS for milk price this season, the average milk price of last 'windfall' season and this 'back to normal' season is pretty good -- $7.1 per kgMS.

 

Bear in mind that average milk price for the last 5 years is about $6.4.

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True, but your logic omits the cost of two droughts for many. And those least affected by the droughts are most affected by the rise in costs. 

Of course there was never any hope for the many believers in Fonterras overwhelming greatness just pushing on through the troughs and enjoying the peaks.

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True, but...Previously when WMP moved in any direction the NZD followed giving a reasonabe price overall. This price drop has not been followed by the NZD which makes it a whole lot harder.

When will the country wake up to an overvalued NZD being very bad for the country in every way except very short term gain on imports.

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In 1966 NZ wool prices suffered a distasterous decline and the then Minister of Finance, Robert Muldoon, had the Government buy the wool, and stored instead of selling it, thereby depriving the market of any excess. Within two or three years prices recovered and it was then all sold profitably .

Could this be done with dairy products and would it work?

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Yep. But

1. shelf life of milk powder is about 12 months, shorter than wool

2. storage costs for milk powder is higher than the costs for storing wool

3. selling milk powder is a 'repeated game' for NZ. If you try to game the market, you will have a bitter taste of being gamed by market.

4. AUS, EU, US will happily take NZ's market share if NZ does what you have suggested

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In 1966 NZ wool prices suffered a distasterous decline and the then Minister of Finance, Robert Muldoon, had the Government buy the wool, and stored instead of selling it, thereby depriving the market of any excess. Within two or three years prices recovered and it was then all sold profitably .

Could this be done with dairy products and would it work?

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Wrong - it was the 1980's - and it took nearly 20 years to clear the stockpile - and then only broke even - hardly profitable

 

4 July 2012

http://www.interest.co.nz/opinion/60082/wednesdays-top-10-nz-mint-china…

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The world’s largest dairy exporter has potentially triggered an international milk price war after the group slashed its forecasts amid an unexpected slump in demand from China and a glut of supplies flooding the international market.

  http://www.cowsmo.com/news/international-milk-price-war-appearing-fonte…   here the telegraph link     http://www.telegraph.co.uk/finance/commodities/11008732/UK-farmers-in-f…
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So chinese interests buy dairy farms in NZ and Chinese demand for NZ dairy products fall.  Of course there is no link, I am just kidding.

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....or alterntaively, Chinese demand pushes up dairy prices, encouraging NZ farmers into debt.  Chinese pull out, prices drop. Overcomitted dairy farmers bankrupt, motgagee sales of dairy land...and the only buyers with cash are???

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Almost to the word, how I would have read it

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Yep, for a case study refer to Australian Iron Ore.

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... we should be unloading those dairy farms onto any unsuspecting foreigners we can get our hands on , Shanghai Penguins or otherwise ...

 

Be grateful for the moola we can garner now ...

 

... once the mortgagee sales start , it's gonna be all over , Rover !

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I was told a lot of banks have financed dairy farms with 30% equity. Banks will be sweating if dairy price keeps dropping some predict it''s heading towards $5. Foreign investors might be lining up if we let them. But why should we let the chinese buy, they have jacked the price up and dropped us in it. I personally think it's time some of the banks are allowed to take some losses. Who is doing the risk assesment on a loan to a business that is selling the majority of it's product to one market. I talked to the head of a major nz meat company 12 months ago and he told me that he wasn't keen to send too much product to China, and spread it through traditional markets. He saw them as high risk.

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It has dropped like it was hot, alright

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The Canterbury earthquake insurance has reached ‘peak’ pay out of $11million a day and will gradually decline over the next few years. Economic stimulation from this therefore has peaked.

http://www.interest.co.nz/news/71304/private-insurers-reach-halfway-mar…

The wheels on the ‘rock star economy bus’ are falling off. To add to the peaking insurance wheel.

Dairy prices down.

Special housing areas and other housing policies failing to provide affordable housing.

Interest rates up as the Reserve Bank tries to stop the housing bubble.

High exchange that will not fall enough to compensate for falling dairy prices due to high interest rates attracting foreign exchange.

Poor ‘pork like’ public investment in areas such as transport, research and the Canterbury rebuild means NZ does not have the safety of falling back on a diversified productive economy.

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Certainly something up to celebrate if true Brendon ?

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There is celebration for those whose life is back on track due to the fair application of insurance contracts. Chris J details this has not been an easy process so it is good that an end is in sight.

For the macro economy the insurance payout has been a stimulator. To the order of of up to $11million a day. That stimulus is coming to an end. So surely a valid question is what is next? Especially given the state of the rest of the economy, with regard to dairy prices, exchange rate, housing inflation and interest rates.

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Those older of us have been through multiple economic cycles and know that there's always issues, risks, and problems ahead, but I see many on here who seem to wish for them. Yes for sure we should always be aware of the issues and move where we can to minimise, but the almost celebration of that possibility by some here have of an impending downturn is pathetic - economic cycles are never a straight line so jury out on what we're seeing at the moment as far as I'm concerned - seen it all too often in the past 

I think there are just far too many who's whole life  seem dictated to by the level of interest rate they have to pay on their grossly oversized mortgages such that they see any downturn and the possiblity of lower interest rates as a good thing (despite the prospect that it could result in the loss of their job, hurt the rental market for them, or whatever that mortgage is financing). 

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Grant I am just telling it how I see it. Not how I would like it to be....

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The younger of us who have already seen several boom and bust periods in our lifetime prey that what comes up must come down, otherwise we're faced with the prospect of being forever held down by those who dominate wealth.  Already it's almost impossible to be able to purchase property in our own country, we are perpetual tennants to landlords who accumulate an ever-increasing portfolio of investments, hoping to dictate the very scenario that keeps us poor and them rich.

 

As for the price of milk, deflation will make the cost of living more affordable for us.  As for losing our jobs?  We are faced with the prospect of losing our jobs every day, whether the economy is booming or not - we don't have employment rights, we don't get wage increases, but we feel the effect of inflation much more than those with weath.  We sit and watch those on here with large property portfolios gleefully wish for the price of property to go up alongside rents - they are totally disconnected from what ordinary people are going through so why should we care if their wealth deteriorates?  We have nothing to lose.  Even more so, when the established fall, opportunities for the young and truly innovative will arise.

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Totally agree Value add - what those people want is two fold, rising inflation to increase their property wealth, and low (and for some of the most naive) even lower interest rates to finance it.  Unfortunately the two don't go hand in hand and they will try to dump on anyone who suggests it. Fortunately, Wheeler is his own man and smarter.

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Oh, honestly.  I know it's a mixed metaphor when talking coos, but there are certainly a lotta Chicken Littles, eh?

 

Some notions for y'all to ponder.

  • what you all may well be missing is that the rise of dairy is subject to exactly the same S-curve as applies to any other business type:  a meteoric start, a steady and seemingly inexorable rise, then a tapering and then a plateau.
  • The business case for new dairy in certain areas is AWOL.  Prices/ha have risen to a point where P/E ratios don't stack up any more.
  • Carrying capacity (sentiment, nutrient tolerances, etc.) is likewise near the top of it's S-curve.
  • There is a massive consolidation under way as small farms are pooled into conglomerates which alone are capable of carrying out the compliance, funding the capex needed for that compliance, and carrying on production using existing techniques.
  • My take is that what we will see is a levelling out and a period of consolidation, as past excesses are digested, effects remediated, and as new production systems take over the old.
  • Glass half full.  Guess what with.....

 

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There is a massive consolidation under way as small farms are pooled into conglomerates....

True.

 

...conglomerates which alone are capable of carrying out the compliance, funding the capex needed for that compliance, and carrying on production using existing techniques..

False.

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