Latest blow to global dairy prices comes amid over supply and expectations that prices will remain subdued

Latest blow to global dairy prices comes amid over supply and expectations that prices will remain subdued

By David Hargreaves

Giant dairy co-operative Fonterra is seen as unlikely to be able to raise its milk price forecast for the current season beyond the current $4.60 per kilogram of milk solids following another disappointing global auction result overnight.

Prices at the GlobalDairyTrade auction fell 7.4%, the second consecutive drop after four strong consecutive rises had lifted prices from the deep lows seen at the start of August. Of particular note in the latest auction was an 8% slump for the key whole milk powder (WMP). Short-dated contracts fared even worse with regular grade WMP offered by Fonterra, for January 2016 delivery, failing to move from its starting price, which was 15% lower than the previous auction price.

The NZX Dairy Futures market had signalled that prices would fall in the auction, but the magnitude of falls was greater than signposted.

AgriHQ dairy analyst Susan Kilsby said there were now lower expectations for dairy commodity prices for the remainder of the season.

"The current outlook for the dairy markets means it is now unlikely Fonterra will be able to lift its farmgate milk price from its current forecast of $4.60/kgMS," she said.

“There is ample supply of dairy product available in the global market and buyers generally have plenty of stock on hand so there is little urgency for them to secure additional stock. The reduction in milk being produced in NZ is being offset by European dairy farmers producing more milk. Until global milk supplies drops further, prices are likely to remain subdued,” Kilsby said.

And meanwhile, ANZ economists are still struggling to see how Fonterra would get even a $4.60 price, and are still retaining their own forecast for a return of $4.25-$4.50 this season.

However, ASB economists - who generally remained more upbeat at a time earlier this year when global prices bottomed and other economists were talking about a milk price well under $4 - are sticking with their pick of a $5 price. Rural economist Nathan Penny said with NZ production "falling hard", dairy markets are turning to other producers to fill the gap.

"As EU, US and Australian production holds up relatively better, markets anticipate other producers can offset NZ declines. We think this market assumption is misplaced - lost NZ exports are too big to cover. NZ production has not fallen this hard since 1999. Moreover, NZ is the largest dairy exporter, and in particular exports the lion’s share of WMP. The EU and others cannot fill the NZ hole. As a result, we expect dairy prices to regain recent losses and for prices to move higher over the course of the 2015/16 season. Consequently, we stick with our milk price forecast of $5.00/kg."

But ANZ rural economist Con Williams said for dairy farmers, the concern remains that prices (at US$2,569/t) are still quite someway below what Fonterra flagged (US$3,000/t) after its financial results as needed to deliver its current forecast of $4.60/kg MS.

"By our assumptions, US$3,000/t should deliver something around the high $4/kg MS, as opposed to mid $4/kg MS. But we don’t have full disclosure to all the working assumptions.

"So if reported correctly it highlights either a worse cost base, higher currency assumption, or slower track in the recovery to US$3,000/t. We suspect it could be a bit of all these things, combined with a touch of conservatism.

"All up it suggests cash-flow will remain tight for dairy farmers into at least the middle of next year and conservative budgets will continue to dominate as market pricing moves more back into line with our current milk price range of $4.25-$4.50/kg MS," Williams said. 

He said milk production now appeared to be tracking 3-4% behind the same period last year. Earlier on it had been tracking 6-7% behind due to a slow start for spring pasture growth and other farm management changes.

"While backward looking New Zealand export data for September was disappointing, and combined with the pick-up in milk flows and some auction volumes potentially failing to clear overnight, this will only increase speculation of increasing inventory levels.

"Offshore European milk supply continues to expand and China’s latest import data for September suggests import demand could be up to 3.5 billion litres (liquid milk equivalents) lower in 2015 for the main commodity products, or nearly 19% of New Zealand’s annual production."

ASB's Penny said the ASB economists expect production to fall 6% this season compared to last, which would equate to the largest fall since 1999.

"NZ farm cashflows remain very tight and cow numbers are down significantly. Moreover, with milk production past its peak and el Niño in the mix, there is little prospect of making up lost ground later in the season. With that in mind and as markets discover that milk is thin on the ground over coming months, we expect prices to regain the lost ground from the last two auctions."

Labour's finance spokesperson Grant Robertson said the latest dairy price falls showed the National Government need to "stop sitting on its hands and come up with a plan to diversify the economy".

“Despite Fonterra putting less product up for sale – as it has done in better recent auctions – prices have fallen significantly. With Europe increasing its production levels there’s little chance of a major recovery for the rest of the year.

“After large fluctuations over the past few months, dairy prices are now where they were a year ago – a time when John Key said he expected a rebound.

“New Zealand is too reliant on such a volatile commodity. No sensible long-term investor would put so much of their portfolio in such an unpredictable investment. They would diversify and spread the risk so they are not so reliant on it."

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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So a massive drop in demand from China is consistent with 7% GDP growth, and a shift towards greater consumption?

Demand drop?

Supply from the EU, AUS, and the US are soaring.

Plus, the EU and AUS both have equally good trade/general relationship with China as NZ has.

So, NZ's comparative advantage in dairy is diminishing very quickly.

Correct , as soon as the EU lifted milk production quota restrictions, it was open season for European dairy farmers to produce more and export it to China, or wherever .

It can only get worse in the long-run as the Europeans get their systems and processes streamlined to export the surplus.

I cant wait for the Europeans to start sending milk here to undercut the horrendous rent - seeking cartel - price - fixing that is rampant in the domestic market

NZ's milk is supposed to be premium by default because of pasture based system.

But Federated Farmers, DairyNZ, banks, and Govt are oblivious to this true precious of NZ, and ask farmers to feed whatever to pump production, and willingly downgrade NZ's milk to the level of AUS, EU and US's, at the same time, struggle to compete with those suppliers at almost every nodes of global supply chain of milk and dairy products.

You're right, xingmowang. The value differential for New Zealand is being destroyed on every account for the sake of increased production.

Just as the official report (Dec 2014) into Fonterra's botulism fiasco asserted that the company put production and market share above food safety, so this industry is putting production and market share above any serious environmental or animal husbandry considerations.

There appears to be no understanding whatsoever in this industry of the only viable long term value-drivers for an agriculturally-dependent economy.

Environmental issues have seen some farmers moving to housed farming systems - believing this to be 'the right thing to do'. The call by some for cows to be barned for environmental reasons is simply turning our systems in to that of the northern hemisphere. As our costs are greater under these systems farmers need to intensify. Which in some cases only compound the problems. Once we have a significant number of cows under roof, we have well and truly lost any pasture based marketing premium we once had.

Agree, CO. And yet respected industry opinion-formers appear to be pushing for housed farming. Example, Keith Woodford, 'The New Zealand Dairy Dilemna', Sunday Star Times, 2nd Nov 2014:

'De-intensification may work for some at the farm level. But at the national level, farming less intensively will impact heavily on export income, upon which we all depend.

'All of the other systems involve some form of off-paddock wintering. These systems can range from stand-off pads designed primarily for heavy rain events, through to fully housed systems. In between, there are the hybrid systems, where cows are housed during the night but let out to graze for a few hours each day.

'Our major overseas competitor is now the US. The main system they are using is to fully house the cows. This is capital expensive but it can provide a very high level of effluent control. Importantly, the Americans are showing that they can be internationally cost competitive with these systems.

'Fully-housed cows produce a lot more milk than either grazing cows or partially housed cows. They also convert feed to milk with considerably increased efficiency. The key advantage the Americans have is that they are much more cost efficient at cut-and-carry feed systems than we are in New Zealand. In New Zealand, we still have lots to learn.'

Plainly, New Zealand still has lots to learn, but not from reasoning like this.

China is buying less milk this year then it was last year (from everyone), you can confabulate that with thought-stopping catchall clichés, but it doesn't change the facts, which are largely ignored. The cognitive dissonance is staggering, or would be if anyone was actually capable of thinking critically.

NZ's disadvantage in dairy is that we don't have subsidies........

Others subsidize for domestic consumers but NZ cannot afford to subsidize for foreign consumers.

I find it very interesting that the massive drop in Chinese demand is the biggest factor impacting dairy prices, while at the same time, it's the one topic excluded from all discussion. I suspect the reason is, as I mentioned earlier, that it doesn't jive with the story that China is growing at 7%, but has stopped buying so much iron and coal because it is shifting to a consumption based economy.

Banks could pull the plug on a few dairy farmers soon

Latest Agri sector credit data at end October was incredibly strong so banks still happy to lend to farmers by the looks

Yes smalltown , and what's more a litre of milk is way cheaper in Oz than here

GO FIGURE !

Why don't you ask Progressive and Foodstuffs to engage in a milk price war here? ;-)
The $1 milk war has proved a loss leader for Coles and Woolworths, but Woolworths has dipped a toe in the high-margin end of the market by releasing its upmarket Farmers Own label of regional milk.
http://www.smh.com.au/business/milk-wars-likely-to-claim-more-victims-ye...

I bought 4 litres of Dairy Dale milk at our local BP station this week for $5.90 -or $1.47/litre. Not that much more than milk in Australia. 47centsNZ is not what I would call 'way cheaper' - especially as the $5.90 includes gst which Aussie milk isn't charged.

You cant defend the indefensible .

A 50% price differential in a litre of milk is an outrage .

What's more , NZ has among the most expensive milk IN THE WORLD !

I grew up on milk , and a generation later I was forced to ban our kids from opening the fridge and downing the stuff.

Quite simply , go tell a struggling low-income family in South Auckland that the milk price is "cheap " and see the reaction you get

It's not a 50% differential when gst is accounted for. In Australia it is a loss leader for the supermarkets so in order to compare apples with apples it also has to be a loss leader for supermarkets here. Hence my comment go ask the supermarkets for a price war.

There are more than 2 certainties in life . They are death , taxes and the next is that things will change .

Like the oil price , anyone who thought the milk price would stay so high forever , was living " with the fairies"

And another point is that Kiwi consumers continue to be rorted with the retail price of milk, its a scandal

Quite simply , its not going to take long before the Australians realise they can ship LONG-LIFE milk here for way less than the hapless consumer is being screwed over for in supermarkets.

And that will be just the start

In an environment where reputation is everything, and is something easily damaged or lost, Fonterra's history in China hasn't been outstandingly useful to the New Zealand brand.

At least one execution followed the scandal that engulfed its partner, Sanlu, in 2008. As the academic study published (June 2014) in The International Journal of Production Economics finds, Fonterra's experience 'did not appear to be helpful' in dealing with quality/safety problems.

Just two years ago, in 2013, there was an astonishing display of chaotic incompetence regarding the possibility of botulism contamination. And remarkably, given this experience, New Zealand still doesn't have any independent food safety authority. Can we really be surprised that EU, Australian and US dairy products are winning market share? And do we suppose that these events haven't damaged other New Zealand brands in China?

Key and Co have squandered the NZ brand as a clean, envoronmentally sensitive producer of high qualify sustianably produced food. The real damage has yet to come, as overeas consumers begin to learn the truth of what price the environment has paid at the bequest of the Key/Fonterra partnership.

Tragic lack of foresight ...and they rubbish the greens as being in cuckoo land.

The worst water quality in Southland is around the urban areas - Invercargill city, Winton, Gore and Mataura.

http://gis.es.govt.nz/index.aspx?app=water-quality

And the rivers you can actually swim in are where?
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11393840

To paraphrase Lili Von Shtup "everything below Cape Reinga is KAPUT"( regardless of what our chief scientist and wide boy Dr Key says)
Embarrassing.

http://www.3news.co.nz/environmentsci/key-grilled-over-nzs-clean-green-i...

Many rivers are swimmable - in parts. I have friends in Auckland that advise any visitor to go north of Auckland for swimming. They won't swim at Missions Bay, Herne Bay etc and you can't blame dairy for that. Family boat and swim in the Waikato River every summer up to 3 times a week, without incident and have done so for decades - but it's not anywhere near a built up area.

We don't have to be able to swim in every river, everywhere - just need to be able to swim in most rivers somewhere. I know of many people who have got sick with giardia from National Parks and none who have got sick from swimming in our rivers. Maybe they are careful where they swim or perhaps maybe, they have a built up a natural high immunity to whatever it is that affects people. Whatever it is many friends and family find places to swim rurally, in rivers every summer. In contrast none of our friends or family will swim in rivers near urban areas.

The Clutha river has many families/individuals enjoying what it has to offer every summer.

The problem with the environment side of it is that too much power has been given to regional councils. We have lost the balance in this country, common sense is no longer common. Be careful where you buy a property. If there is a natural stream running through a town don't assume that the protection of your home from flooding is a priority over protecting the environment.

Perhaps tim, the real difference is that overseas the people are prepared to put their money where their mouths are, and pay subsidies/grants to farmers for environmental good.
This rewards farmers for adopting and maintaining, as part of their everyday activities, a more sustainable use of agricultural land and caring for natural resources.
http://ec.europa.eu/agriculture/direct-support/greening/index_en.htm

And others are prepared to subsidise their farmers in order to ensure the nation can feed itself - or in a large part their dairy is locally produced and not imported.
What will it cover?
The Income Guarantee Program will keep producers whole by providing 100 per cent income protection to producers for 10 years. Income support assistance will continue on a tapered basis for an additional five years, for a total of 15 years. $2.4 billion is available for this program. Annual payments will be directly linked to the amount of quota a producer holds.
The Income Guarantee Program transfers with the sale of the quota,.......

Europe to give struggling farmers €500m in aid
http://www.bbc.com/news/business-34171946

Many New Zealanders want lower prices and higher compliance costs for NZ farmers, and will refer to overseas prices etc. What they choose to ignore is that in those countries the consumers are propping up farmers via various subsidies/grants etc. Most definitely not a level playing field and comparing cheese and chalk.

CO, your argument regarding dairying subsidies elsewhere is fallacious. Every New Zealand ratepayer and taxpayer is already, in your expression, 'propping up farmers' by picking up the bill for the immense environmental damage consequent on unrestrained dairying. The bill for this is far beyond the industry's ability to pay - if it had the will to do so - and is increasing every year.

Once the bills for cadmium soil-poisoning start to come in (and New Zealand is well above EU health limits in this already), you'll see the subsidies for this industry truly explode.

Disagree - DIRA is responsible for the growth in dairy - I have heard Forest and Bird argue this. If Fonterra was not compelled to take milk from everyone who wanted to supply it it could have seen areas such as Ranfurly/Omakau etc that are only marginal areas for it to collect milk from, remain dairy free. It could also have matched supply to factory size better too, instead of having to put $$$ in to building more stainless steel. It could also have grown organically instead of having to reactively act to increases in supply.

What exactly are these costs? - 'Every New Zealand ratepayer and taxpayer is already, in your expression, 'propping up farmers' by picking up the bill for the immense environmental damage consequent on unrestrained dairying." Farmers are both ratepayers and taxpayers too.

With leach rates of 36 for Dairy, 12 for Sheep, and 4 for Forestry 100ha dairy, 300ha sheep and 900 forestry will all leach 3600kg in to the same receiving waters.

Looks like there are many ways to be exposed to cadium.
You can be exposed to cadmium by breathing or ingesting it. Exposure can occur if you smoke cigarettes or breathe second- or third-hand cigarette smoke. You can be exposed if you eat foods that contain high levels of cadmium, such as shellfish, liver, and kidney meats. Other foods that contain cadmium are grain cereal products, potatoes, and some leafy vegetables. You can also be exposed if you drink contaminated water or live near an industrial facility or smelter that emits cadmium into the air. People who fish in local waters for food may be exposed to fish in which cadmium has accumulated.
At work, you can be exposed to cadmium if you work at a smelting or electroplating facility, a battery or fungicide manufacturer, or photocopying site. Other industrial processes that include a risk of exposure to cadmium include abrasive blasting, gas welding and cutting, metal preparation and pouring, painting, processing scrap that contains cadmium, steel welding, textile printing or dyeing, semiconductor manufacturing, and soldering. Exposure may come from inhaling cadmium dust or fumes or ingesting contamination on your hands.
At home, you can be exposed to cadmium if you make ceramics, jewelry, or enameled crafts. You may also be exposed through glassblowing, painting, or ingesting an herbal remedy that contains cadmium.
http://toxtown.nlm.nih.gov/text_version/chemicals.php?id=63

"The bill is far....." - disagree. Dairy farmers unrestrained expansions such as buying up the neighbors farm during the good times and not worrying about the environment has meant on paper multi generational farmers are sitting on estates that are worth tens of millions. Why should they have not paid to minimise their pollution along the way? Now we are all feeling sorry for them let us not forget the values of some of these farms. If they are struggling, sell the back 40. Subsidies - forget it and the same applies to Aucklander's who might be over leveraged on investment properties.

expansions such as buying up the neighbors farm during the good times and not worrying about the environment has meant on paper multi generational farmers are sitting on estates that are worth tens of millions.

Your point of the above is?
a. Farmers should not have bought up the neighbours farm as it made them get wealthy? (If they bought a neighbours farm then it is more than likely it was of similar type - that is dairy, if the purchaser was dairy farming; sheep if it was a sheep farmer etc. In that case there is likely to be very little change in environmental outcomes.)
b. Your assumption is that only multigenerational farmers did so? (I know of many first generation New Zealanders who did/do this. As they aren't 'multigenerational' farmers, does that make it ok by your standards?)
c. That you are envious of them sitting on 'estates' (a very English word for a farm) worth tens of millions. (You aren't a disenfranchised Englishman are you?)
d. 'not worrying about the environment'. Mmm... A farmer relies on the environment for their living and in many instances draw their drinking water from streams/underground aquifers on farm. Dairy farmers are paying to minimise their environmental impact. The issue is for many waterways it won't be apparent for years and in some cases decades. BUT if no one else takes responsibility for their part in water degradation, all the effort in the world by dairy farmers won't stop the slow but continual degradation.

I am not advocating for cash subsidies - but that is the cost to consumers overseas in order to have a viable farming industry and locally produced dairy consumer items.

I agree CO. quite a few poms on the regional councils bringing ideas here that are not financially sustainable. It's easy for people to write blogs on here voicing their opinions on environmental sustainability, but in the real world someone pays. When a regional council radically changes the rules and it affects a farmers income who pays? Who wants to own a swampy paddock when they used to own a paddock? Do I hear any bids on a swamp? What? no bids on a swamp at paddock prices?

Sounds great to me. PS "common sense" frequently isnt.

CO, are you having any compaction problems after this winter? I've been talking to a friend who is in the business and has significant compaction problems. Becoming a problem here in the Techno systems.
I'm with you Fonterra should never had to take the milk, it just crazy, that and MPI's goal of doubling income from Agriculture have a lot to answer for.
I have unit of bulls coming up from Southland, long way but cheap enough to make it worthwhile, take it you are still short of feed?

No more problems than usual Aj. We winter on our runoff. Every crop paddock (on runoff or farm) is ripped/subsoiled when it's finished, and has been for the last few years. We find that does make a difference. We have our own ripper/subsoiler so it is easily done when we want to. I could see that long term, techno systems could have an issue - the numbers of animals/ha that they winter could be very high.

Was at an intersectorial meeting here where a desk jockey had put up a model of a potential dairy wintering (grazing) scenario. The graziers present were quick to point out that what had been put up was not long term sustainable from a practical farming viewpoint, in relation to how much of a farm can be cropped. Made me wonder about the difference between theory and practice etc.....

We are a good two weeks behind in grass growth but it is growing well now, and we are fully feeding cows on grass - no supplements. Season to date we are still behind last year's production but are starting to make up that deficit. Managed to make the first lot of balage at the runoff this week. Conditions throughout Southland do vary a bit though.

Old timer says an El Nino in the far south means cutting hay in the rain and making hay in the rain - so we are expecting a wetter than usual summer. ;-)

My vineyard is 30 growing degree days behind normal, been a tough spring. Wineries appear to have unsold wine from last year ( and some the year before)but it's hard to tell with all the marketing hype.
Some bull beef farmers purchased expensive cattle in the fall and now it's not looking such a smart move.
Beef prices could go the way of dairy.

I have been wondering if those techno systems cause pneumonia problems. Pretty mean not allowing cattle to get out of the weather. They are left to huddle like emperor penguins. Yes the beef price has hit the skids Aj, this bit of rain will help a bit.

Going to be interesting to see what comes out of this Belle.
http://www.stuff.co.nz/southland-times/news/73656973/animal-welfare-emer...

Animal rescue on the same footing as human. Hmm. Dont quite know what to think. Sounds like a recipe for disaster. It should be something we are mindful of, but putting it in the rulebook...not sure thats smart.

Grapes here are 2/3 weeks behind last year. There's 6 choppers that flew in tonight sitting down the road ready to tackle the frost in the morning. Last time they start up at 1am.

Still pouring here, too much rain to allow a freeze, which wouldn't happen till Friday morning, we will just fog now. I have a little frost damage from a nasty short spike last week, frosts are the hardest things to keep on top of and expensive to boot. Sounds like you lot have the same 30 growing degree day deficit we have.

Manufacturing fell again in the Auction this week and my Rancher friend tells me it's firmly a buyers market. Ylg bulls are cheap enough though.
I've never been a fan of those Techno systems, AFFCO were one minute saying all cattle need to have shade and access to water 24hrs a day, the next everyone is going Techno.
Looks like the compaction problems could be the last straw.

Good. I have given up the winter electric fencing regime. Its ok in the frosts but when the weather gets rougher I let them go and they can find shelter. And winter here is mostly rough. They certainly do better Aj. Hell thats a big trip from southland. Do you mind me asking the cost? I was at a weaner fair down there last year and felt the stock were pretty cheap but I had driven down and didnt imagine weaners surviving a trip that far home.

just over $700 landed, nice cattle

Your game Andrew, has el nino ebbed in the Hawkes Bay ? We have had 30 odd mls today. Looking good here for now.

been short and dry but must have had 40mm by now

Hah that will kick el nino in the guts for a while.

High low high low...............assumptions mainly it would appear makes an ass of the analyst. Or banks want to remain upbeat sell off their bad dairy debts and then suggest reality, hidden agendas

No more time for Wizzards and their Wands.......they have just given the answer here AgriHQ say flat commodity prices from now till end of season. current WMP at $2500 and needs to be at $3000 to achieve $4.60 payout..............reality would then suggest 5/6 of $4.60 payout is $3.80. No wizzard needed

I have noticed driving around our area the farmers who converted in poorer areas haven't got a blade of grass. Obviously can't afford to buy production like they were doing.