Despite some signs of stabilising dairy prices, economists see any chance of a sharp rebound in returns as a 'distant prospect'

Despite some signs of stabilising dairy prices, economists see any chance of a sharp rebound in returns as a 'distant prospect'

By David Hargreaves

Economists at the country's biggest dairy farm lender ANZ see any chance of a sharp rebound in dairy prices as a "distant prospect" and are picking a "tough" forthcoming season.

Global dairy prices dropped again last night, with prices down 2.2%, the fifth consecutive fall and taking prices to their lowest level since mid-2009 - though there was some sign prices were stabilising.

The Reserve Bank has warned that financial stress in the dairy sector "could rise markedly" if prices remain at low levels in the 2015-16 season. The RBNZ estimated in its six-monthly Financial Stability Report released last week that despite many farms being in a position to manage down working expenses, around one-quarter of dairy farms are believed to have negative cash flow for the 2014-15 season.

"The sector’s vulnerability to reduced incomes is increased by elevated indebtedness, despite moderate growth in borrowing since 2009."

The central bank said that approximately 30% of the dairy debt was concentrated among the most indebted 10% of farms. "Indebted farms are particularly vulnerable to a period of reduced cash flow."

Dairy giant Fonterra recently dropped its forecast milk price for farmers in the current season to $4.50 per kilogram 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.

Fonterra will make its opening milk price forecast for the 2015-16 season next week and the ANZ was today sticking by its pick that the opening forecast price will be between $5 and $5.25.

ANZ agri economist Con Williams said a "tough" season awaits farmers.

"We are expecting something in the $5.00-$5.25/kg MS range, which with low deferred payments from 2014/15 will make the 2015/16 season very challenging for many operations," he said.

Williams said skim milk powder (SMP) prices had been "at the centre of the storm in recent months" with aggressive selling from Europe into key New Zealand markets.

"Worryingly the later delivery contract periods have softened more aggressively at recent auctions pointing to little buyer anxiety that they will need to pay higher prices anytime soon," he said.

"The price action was a little more encouraging for whole milk powder (-0.5%) and suggests that a trough is near, but a sharp imminent rebound seems a distant prospect. Taken with NZD strength in recent months we expect more conservatism to be applied to next week’s opening Fonterra milk price forecast for 2015/16."

Industry has 'evolved'

Westpac senior economist Michael Gordon said there were signs that the global dairy industry had evolved since the 2008-2013 period "when New Zealand was uniquely positioned to service the rise of the Chinese market".

"Several years of higher dairy prices, on average, have incentivised other countries – including China itself – to expand capacity in their own dairying sectors, leading to greater flexibility in the global milk supply. The removal of excess production levies in Europe will play a part in that greater flexibility over the long term, although in the near term low milk prices are likely to be a restraining factor on production growth. Consequently, it’s possible that farmgate milk prices over coming years could be lower on average, after adjusting for inflation, than they were in the preceding five years," he said.

Westpac economists are forecasting a milk price of $5.70/kg for next season, which "is below the average of the last decade".

"...The soft result from last night’s GlobalDairyTrade auction puts the risks around our forecast to the downside once again. Note that our forecast is for the final price at the end of the season; we don’t take a position on where Fonterra will pitch its own initial estimate for the season," Gordon said.

'In the doldrums'

ASB chief economist Nick Tuffley and rural economist Nathan Penny said they were sticking with their milk price forecasts at $4.50/kg and $5.70/kg for this season and next season, respectively.

"The timing of any price rebound remains difficult to predict. If NZ (and global) milk supply remains high and Chinese demand weak, prices may take longer to recover than we currently anticipate," they said.  

"...Dairy prices are in the doldrums. They are low and going nowhere fast. Prices are now at their lowest level since 2009. Moreover, we expect prices to remain low over the next two to three months, before finally beginning their lift. NZ production has got a second wind, ending the season on a high. We expect production this season to lift 2% on last season.

"This result is a far cry from the gloomy production expectations during the height of this summer’s drought. In contrast, demand is weak. In particular, demand from our key market, China, has fallen like a stone. Export volumes for the nine months to March 2015 are less than half what they were for same nine months a year ago.

"All up, we expect this means that the prices will remain low for a few months more. Markets still need to clear this season’s extra production, plus further months may be required before farmers here and globally respond more fully to low farmgate prices by lowering production.

"Also, measures by Chinese officials to boost demand will take time to gain traction. Dairy industry sails will fill again in time and prices will lift. Exactly when that welcome warm breeze it arrives remains hard to pick. But for now, we are earmarking sometime around spring," Tuffley and Penny said. 

'Positive signs'

AgriHQ dairy analyst Susan Kilsby said despite the fact that dairy prices had now dropped for five consecutive auctions there were some positive signs "starting to trickle" into the market.

"European milk supply is now at its seasonal peak and the growth in supply appears to be moderate rather than excessive which will reduce fears of a global oversupply of milk,” she said.

“...The markets now appear to be slowly starting to turn but this optimism is yet to be reflected in the GDT prices.”

Labour's Finance spokesperson Grant Robertson called for "meaningful" Government action in tomorrow's Budget.

“Dairy prices are the lowest since August 2009 and have more than halved since its February 2014 peak," he said.

'Black hole"

“This has created an economic black hole of $7 billion from the forecast Fonterra payout cut that will suck in regions reliant on dairy and crucial industries, as well as the Government’s books.

“If the price keeps falling or even stays where it is, Fonterra’s payout will be significantly lower than forecast and the economic black hole even bigger.

“The lion’s share of the milk price pain will be felt in regions that National is neglecting. Many small communities are now mainly reliant on dairy farming. We want the dairy industry to thrive but it isn’t good for farmers to carry much of the burden of economic growth on their own.

“New Zealand needs a modern, diverse economy that creates well-paying jobs across all industries. This Budget must show a plan to get there,” Robertson said.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Prices declined, why was the dollar not affected? The experts were saying prices would begin recovering as chinese inventory ran low but prices are still falling.

Russian ban forces EU agri producers to look east. For example, we have seen record pork import from EU by South Korea, squeezing the share of its largest importer -- the US. Of course, weak Euro played a part.

Coincidentally, EU lifted its milk quota, animal feed price at a 5-yr low, all thess factors created a lot more suppliers of whole and skim milk powder for Chinese buyers to choose from.

Without any idiosyncratic changes affecting animal feed costs, animal health, and milk supply, I am afraid that NZ farm gate milk price will stay around $5.5 kgMS, where it should be.

We can live with $5.50, it's hard but at least it pays the bills. $4.70 is under cost of production for most wages paying operations, and $4.50 doesn't even cover feed and minimum wage (let lone the upgrades the MPI and government are demanding)

What about the newly converted farms with high debt levels and expensive infrastructure? Dams, irrigation etc?

What about the newly converted farms with high debt levels and expensive infrastructure? Dams, irrigation etc?

it was already factored in about a month ago (ie the prices dropped then, the current news just confirms it)

Prices declined, why does the consumer not benefit? The experts say local prices are set by what can be achieved globally.

Laugh of the day

GMP.

As a company director I _couldn't_ sign my company onto the GMP scheme.

Fonterra was unable to identify HOW they were getting $7 for the same milk pool as everyone else.
Either they had a separate forward contract they weren't revealing and that product was "going around" the side of the gDT auction trade (possibly illegally).
or part of the co-op pool was going to be getting better price than others (illegal under the co-op rules).
or they'd done an insider trader deal with their own Fonterra Products and sown up a guaranteed supplied to insure dividends weren't going to affected like last season (which again was (a) illegal, and (b) unwise as the payout always nosedives after a peak payout).

The interesting part is indvidual farmers did not want it, and did not want to worry about hedging indvidual, that was why they have a co-op to take all those pressures away from the day-to-day pressures of running on-farm businesses.

Yet Pengxin (or whatever they're called) were a big proponent of the GMP, they're the biggest beneficiary of the system...but they're also a very large customer of Fonterra's !!!! So by bidding deathly low at the auction, it doesn't matter because they can make the profit off the GMP because they have insider information as they are both large customer and large supplier.....
the co-op was supposed setup to stop exactly that kind of influence in the market...but Fonterra employee big paychecks are all paid, government big paychecks are all paid, DairyNZ big paychecks are all paid. Commerce Commissions big paychecks are all paid. so whats the problem eh?

with Peng, could show how geared up/debted up they are as large loans could be motivation for wanting a "fixed" price, also explains why Landcorp the share milker (think of the overhead - lets NZers fund the livestock - again reducing "asset risk"), as a Mr financier would not trust Peng (themselves) or local/usual sharemilkers to be an acceptable "counterparty risk"

being the biggest borrower of all could explain the booting of Synlait farms mgt,
http://www.stuff.co.nz/business/farming/dairy/68593520/synlait-farms-fou...

how can a ..... ex employee then be fronting best/big customer etc, etc... what happened to out means out. - issues of trust non?

"In particular, demand from our key market, China, has fallen like a stone."

Can't be true, the EXPERTS said China will take everything we can make and more. And they got to keep their big salaries.

Yup and the dumbo no-nothings were calling this way back when, possibly loudest around the time the Crafar farms were sold

So lets review, some of the biggest sooth sayers in here like Roger have been promising inflation any day now, however by 2016 even 2% CPI looks a stretch. Bank economists busy predicting rising rates etc and well um no. The world's financial guru's writers spent considerable words in predicting china was going to take off and save us all. Meanwhile. since 2004 prices have climbed as oil went up in price. When oil got to $148 in July 2008 the world's economy did a woopise and all but imploded. Since then oil has recovered to and been around the $100 mark and the world's economy has stuttered along. Bring in some shale oil and the lack of demand for it at the above price just didnt work. The world cant afford to pay $100 a barrel IMHO. Now we are down to $60 with an estimated 2mbpd over capacity, has that helped? no the oil producers are in a bad way as well as the oil users. China frankly looks like an over-heated, mis-managed pile of doo doo. The EU? rinse and repeat...USA? hmmm. think not. So our 3 largest markets are on their knees and at least china looks like its going to face plant. Strikes me as a huge amount of misguided, politically blinkered wishful thinking, yes bound to come out well....

I blame whomever gives these economists their oxygen! Go and read back through the predictions, esp agri HQ etc. Absolute crap. About as finessed as our met office.
How does it go...? : using the rearview mirror to predict the near term future, and the fuel gauge to predict how far to the next petrol station. Wrong metrics.

The NBR has this headline:
''Decade of dairying reveals plateauing of profit''

Mike Joy has claimed for some time that dairying is now all about the capital gain and little to do with the day to day profit as input costs have rocketed. Looks like he is right.

And then there is drought to consider. Lots and lots of drought going forward. Pesky climate change.

Forming up for a strong El nino in 2015/16, maybe even one as big as 1998. So 2014 didnt break any records (apparently, yeah right) it just "matched" 1998 but without an el nino.

Open Country coming out with $4.75 to $4.95 for 2015/16.

Not good at copy n paste on the phone but check out Stuff Farming. Poor bugger gona put aside $1000 a week to live on and hope for the best. OD currently 300k. Mebe he has a big family. But really? Lets see....no rent, no fuel expenses, no car expenses, power and phone probably paid by farm, free milk and meat. Am I that outa touch or is a grand a week for food and clothing pretty damn generous when things are dire?

I worked on $50/week. But _only_ farm staff were allowed/required to use the facilities, not family members.

I would say $200/week if they have a family. meat (and milk for dairy farmers or mates of dairy farmers) are also freebies - although you tend to get tougher meat (ie from culls, rather than select cuts).

Internet also tends to be free, as is the computer (up to computer gear of $5000) as an Internet connection is needed for some of the record keeping.

The farmer never said that is what he is going to do. It is DairyNZ that said to put aside $1000pw. As a DairyNZ regional manager this chap has a regular salary, and probably considers $52k the minimum he could live on. Real farming families find a way to 'make do' and if need be seek work off farm for one partner. For some farming families I know, $52k would mean a significant increase! ;-) Shows the disconnect Belle, between 'advisors' and those that do. ;-)

You are right Cas Ob. Gee what planet are these guys on? Dairy NZ advice. Priceless.

In 2007 MAF Policy requested work to analyse what they viewed as the unsustainable dairy intensification. The study used production economics and marginal analysis and found that about 25% of the cows were being milked at a marginal cost. http://www.agprodecon.org/node/99. This study was dismissed by then Dexcel and was never published. In 2010 a paper that more clearly questioned the manner in which dairying was heading was presented at NZ Agricultural Resource Economics Society. This was ignored by all. http://econpapers.repec.org/paper/agsnzar10/96492.htm
A concerted effort to get the message across was made at the 2014 NZARES conference but was again firmly rejected http://ageconsearch.umn.edu/bitstream/187404/2/Ridler_etal_2014.pdf and http://econpapers.repec.org/paper/agsnzar14/187491.htm . The dairy industry and Regional policy makers just continued on a course that was by then showing obvious cracks in an already shaky structure. Behind all these attempts to encourage economic and environmental reality was a real economist, Peter Fraser who is still exposing the problems inherent in the way agriculture operates at all levels in NZ. It seems collapse must occur before those in power are brought to account; but maybe not even then.

Strategies for increasing dairy production while controlling environmental footprint on dairy farms in Canterbury, New Zealand

.....The Pastoral 21 programme in Canterbury is comparing two farming systems taking two different approaches to future industry development.
One (HSE) is based on a stocking rate (SR) of five high genetic merit cows/ha with up to 400 kg N applied as fertiliser per year, plus up to 800 kg DM/cow bought-in feed. This system produced 2290 kg milk solids (MS)/ha and was highly profitable (operating profit $NZD5061/ha) but had a relatively high predicted nitrate leaching (35 kgN/ha).
The second (LSE) has a SR of 3.5 high genetic merit cows/ha, up to 150 kg N/ha applied as fertiliser, and 40% of the pasture area in a diverse pasture mixture containing herbs and legumes. It was also highly profitable ($NZD 4860/ha) and leached 45% less nitrogen, but produced 500 kg MS/ha less than HSE.....
A comparison between the HSE and LSE systems, in-cluding both the milking platform and all other land contributing feed used for milk production, shows that this traditional performance metric over-estimates milk production and underestimates the potential environmental impact of the system.

http://ifsa.boku.ac.at/cms/fileadmin/Proceeding2014/WS_2_7_Dalley.pdf

Henry Either the cow numbers under HSE are wrong or the ha's are wrong. How did they get to their respective SRs. With the figures on Table one, even accounting for the 3.5ha support block, the stocking rate doesn't add up with the cow numbers.

I expect this document was checked for accuracy before published. If this was missed - what else doesn't add up.

I'm happy to be corrected on this :-)

you're not wrong the figures seem to sum diagonally back and forth...