By David Hargreaves
Economists are still picking a recovery in global dairy prices - but now see this happening later than was earlier expected.
Commenting on the overnight GlobalDairyTrade Auction results, which saw prices hit a six-year low, ASB chief economist Nick Tuffley and rural economist Nathan Penny Dairy said prices were "low and staying there a while longer".
Dairy giant Fonterra last week dropped its forecast milk price for farmers in the current season to $4.50 per kilogramme of milk solids from a previous pick of $4.70. Including dividends, the total return to farmers is forecast at between $4.70 and $4.80, compared with $8.50 just a year ago. This suggests a drop in earnings this year of about $6 billion for Fonterra farmers alone and about $7 billion for the dairy farming sector.
ANZ agri economist Con Williams said local dairy farm budgets were showing a hole "of anywhere from $0.5-$1.5/kg MS", which suggested that seasonal finance requirements "could stack-up toward $1.85 billion in 2015/16 (nearly 5% of total outstanding debt) unless more cost efficiencies can be found".
AgriHQ dairy analyst Susan Kilsby said an increase in the number of companies buying product on GDT indicated that demand was beginning to improve, but this increase in demand was not yet being reflected in the prices.
“It’s a buyers market for SMP [skim milk powder] at present with strong competition between NZ and European suppliers who are operating in the Asian and Middle East markets. A better than expected end to the 2014-15 milk production season means NZ dairy companies still have some current season product to sell, while European milk production is heading towards its seasonal peak.”
ASB's Tuffley and Penny said they expected dairy prices to remain low over the next two to three months, before "finally beginning their lift".
They have now dropped their forecast milk price for next season to $5.70 from $6.20 - though this does only bring ASB more into line with what some other bank economists are now picking, with ANZ, for example, already forecasting $5.50-$5.75 and Westpac $5.70.
Tuffley and Penny cited a key fact in the continued weak dairy prices being the "second wind" that production in NZ had got.
"At one stage, Fonterra forecast this season’s production to fall 3.3% compared to last. Whereas now, Fonterra expects this season’s production to lift 1.5% from last season’s level. Meanwhile, demand is proving slower to recover."
"...We still expect production growth to slow to the point where demand can catch up, but this point will come later than previously expected."
They said that "a number of farmers" were losing money at current farmgate prices, so dairy production was likely to slow as the new season began.
Meanwhile, Chinese officials had swung into action to boost the flagging Chinese economy.
"The Chinese economy usually responds well to stimulus, but the current growth weakness may require additional stimulus moves and thus demand may take longer to gain traction than first thought.
"...NZ’s WMP March exports to China, for example, are less than half what they were in March 2014. Admittedly, March 2014 was during the exceptionally strong period of demand, but even compared to March 2013 WMP exports to China are over a third lower."
Tuffley and Penny said they expected by the end of the 2015/16 season that whole milk powder prices will have recovered to around USD3,400/tonne.
"But with recovery expected to now be that much later in the 2015/16, the season’s overall outlook is now lower."
ANZ's Williams said sharp declines in SMP prices pointed to "immense competitive pressure" from both the US and Europe (the two largest global suppliers) with prices now down 30% over the last four auctions.
"Prior to the last auction New Zealand sourced SMP was trading at a premium of US$100-200/t over Europe and the US, which is not unusual as we enter the off-season.
"However, overnight’s auction result pulled New Zealand sourced product below both competitors. Europe remains the focal point for New Zealand with reportedly aggressive selling into key regions, such as North Africa, Middle East and Asia (ex. China).
"This pressure is unlikely to abate in the near-term with recent reports suggesting Russia will extend their import ban until at least the end of the year and want to be self- sufficient in milk supply within the next 7-10 years. Europe also needs to move the peak of this year’s seasonal supply (March-May).
"The only real bright spot is that international prices are now only approximately US$100-150/t from intervention prices in Europe, suggesting one backstop is fast approaching."
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