By David Hargreaves
A milk price for farmers of in excess of $6 per kilogram of milk solids this season is now seen as possible after a big leap in global dairy prices overnight.
In the latest GlobalDairyTrade auction, overall prices as measured by the GDT Index surged 11.4%.
However, the key Whole Milk Powder price did even better, rocketing 19.8% to an average US3,317 per metric tonne. That's the highest price since July 2014.
On September 21 Fonterra increased its 2016/17 forecast Farmgate Milk Price by 50 cents to $5.25 per kgMS on the back of the recent global price gains. When combined with the forecast earnings per share range for the 2017 financial year of 50c to 60c, the total payout available to farmers in the current season is forecast to be $5.75 to $5.85 before retentions. See here for the full dairy payout history.
While a milk price possibly in excess of $6 this year would hardly be a return to the halcyon days of a few years ago for farmers (the price was $8.40 in 2014), it would be a big relief after two poor seasons of payouts - below breakeven for many.
And it is worth considering where we have come from. Fonterra's opening pick for a milk price this year was only $4.25. This was boosted to $4.75 only as fairly recently as August 25 and was then lifted again in September.
ASB economists, who not so long ago were out alone on a very long limb with a prediction of a milk price of $6, now see a "growing risk" that the actual price will surpass "our already bullish forecast" this season.
"At this juncture, we point out that prices have lifted earlier and higher than we anticipated," senior rural economist Nathan Penny said. "As a result, if NZ production is indeed as weak as we now anticipate, then prices are likely to stabilise at current levels, if not lift further. In this respect, we see an increasing probability that this season’s milk price lifts above our current $6.00/kg forecast."
BNZ economists have now matched the ASB pick, with their own $6 forecast, up from $5.30.
AgriHQ analysts said dairy markets had "reacted sharply" to tightening milk supply in New Zealand.
Last week Fonterra announced it had reduced its milk production forecast for its NZ collections. It now expects to collect 1,460 million kg of milksolids (MS) in the 2016-17 season - 6.8% below the volume collected last season.
The reduction in milk collections prompted the company to offer less product for sale on the GDT platform. The volume of WMP available was revised down by 4.9% against forecast for the November 1 event. This left 14,600t of WMP available for bidders across the six delivery periods - 18% less than offered at the previous auction and also 18% less than was on offer in early November last year.
"The lift in dairy commodity prices will be welcomed by NZ farmers who continue to battle with low returns. The cash flow of most NZ farmers will have deteriorated further in recent months as farm expenses typically exceed income levels during the spring period," the analysts said.
"This positive GDT result will put upward pressure on milk price forecasts."
ANZ senior economist Philip Borkin noted that short-dated contract, particularly for WMP, rose sharply, "so there does appear to be an element of buyers scrambling to meet near-term demand against a backdrop of reduced local supply".
"But even so, forward curves have been marked higher in general too.
"The key question now is whether or not gains can be maintained, especially with the possibility of warmer temperatures seeing improved North Island pasture growth.
"Even so, farmers will no doubt welcome the move and it certainly suggests upside risks to milk price forecasts, perhaps into the low NZ$6 mark (per kg MS)."
Westpac economists raised their forecast milk price to $5.80 from $5.30. Westpac senior economist Anne Boniface said after several auctions when prices remained broadly stable, markets seemed to have reacted strongly to Fonterra’s revised production estimates for the 2016/17 season.
"In particular, Chinese bidders were notably more active in the latest auction, crowding out buyers from other regions. This suggests a genuine concern about being left short of stock is helping drive prices higher."
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48 Comments
Don't get me wrong, they need this, the country needs this, but aren't they gaming the system by reducing volumes 18% with prices then increasing? Supply/demand at its finest.
Total return much be reasonably similar to previous auctions where there was more product with lower prices.
You misunderstand the importance of volume on a market like this. No supplying participant in these auctions (and Fonterra is only one of seven dairy companies in it) ever offers all its product at an auction. All only ever offer a fraction.
However, so long as it is a 'significant quantity', it serves the purpose of transparent price setting. Anything over 10,000 tonees on offer is 'significant'.
Most actual sales go on outside the auction markets. But the prices revealed in these events become the base of most off-market contracts.
When you say "Most actual sales go on outside the auction markets", do you/anyone know/have an idea of (anecdotally) how proflific forward contracts are within the market on a volume and lead basis?
It would be interesting to note and give a bit more context to these auctions. How you'd get a hold of the actual data, I don't know.
There are methods for estimation, but might be sketchy without validation/calibration.
In the year to June, there was about 370 tonnes of WMP sold on the GDT auction platform. In the same period, more than 1,360 tonnes of WMP was sold and exported from New Zealand. That means the auction system only cleared 27% of the NZ production directly. 73% was sold outside the auction markets. I am sure the auction prices had a dominant influence on the non-auction contract prices however.
(I also doubt forward contracts end up being delivered in actual product. My guess is that they are closed out for cash. The variance represents the hedging the traders are buying. There will be some speculators in there too, and some market makers. I am sure they don't want physical product dumped next to their ivory tower computer screens.)
This paper is a little dated but nevertheless still highly relevant. In recent years, many farmers have made enormous strides to lessen their environmental impact but too many are in the 'do nothing' basket with the tacit approval of the box ticking Farmers Union.
http://www.nzae.org.nz/wp-content/uploads/2011/08/Estimating_Values_of_…
Yes, many farmers are lessening their environmental impacts but the national environmental state, as impacted by dairying, is fast heading downhill. To quote from your excellent linked paper, ‘Dairy farming intensification has led to severe degradation of several ES [Ecosystem Services]'. And ‘improvements in environmental management by farmers are invariably offset by intensification of production, or the conversion of lower intensity land uses such as sheep and beef farming to higher intensity uses…’
And there's almost no chance, whether WMP prices are in the stratosphere or on the floor, of having the industry take responsibility for this degradation. The reason is simple. To quote from the conclusion of the linked paper, 'The main reason is the price paid for dairy products does not reflect the external costs of depleting environmental resources or causing environmental degradation.’
Simply, we have a low-value industry absolutely dependent on avoiding its accelerating and considerable high-cost environmental impacts.
Probably at the same point the non dairy sector makes enough revenue so that they can begin to pay for all the damage they do to our aquifers and freshwater systems, Gummy Bear H. ;-) Dairy is only approx 30-35% of pastoral land use in Southland.
For mitigation measures to be effective in reducing nutrient loads, it’s important that they be adopted by sheep, beef and dairy farms. Sheep and beef farms remain the dominant land use by area in Southland. However, losses from dairy farms are greater per hectare. Overall the losses from both farm types are significant.
http://www.es.govt.nz/Document%20Library/Factsheets/Science%20summaries…
Sediment collected from streams and rivers flowing through Invercargill had higher metal and DDT concentrations than those passing through agricultural catchments. This is likely to come from stormwater discharge.
http://www.es.govt.nz/Document%20Library/Factsheets/Science%20summaries…
True, CO, dairy is merely one factor adversely impacting our water, soil and air. And all human activity, existence itself, has some detrimental impact. But, if we're to get any responsible behaviour in any industry, we cannot pass the environmental costs to the public purse or to future generations. The polluter pays principle must be applied wherever possible.
The question to answer is, surely, why should I or my children subsidise any industry, any company, any township, anybody, unable to afford to mitigate directly attributable, irresponsible, adverse impacts within the environment we share? The sawmills have left toxic sites all over the country. Many coastal settlements have sceptic tank and sewage issues. Major cities here have wretched environmental standards. New Zealand has had - and much here still has - a rip, shit or bust way of doing things. This has to change - and I know, from your previous posts, that you take these issues seriously. Not everybody does.
The thing about dairying is that it is enormously influential nationwide, and appears to be handing on problems unaffordable to the country, let alone the industry. Just as previous industries here have been and have done. Dairying gets it in the neck because it's a large target.
"Dairying gets it in the neck because it's a large target." True workingman. But that is because it suits a section of the environmental movement to do so. The travesty of it is that it allows the general populace to wrongly believe that they have no impact. So when the Councils have no option but to put up rates to pay for new sewage schemes, the ratepayers get vocal about rate rises and in my area vote out the mayor and some councillors. All the while not accepting that they can't continue to use discharge to the Clutha as their sewage solution and that they will have to pay for a new system.
"The question to answer is, surely, why should I or my children subsidise any industry, any company, any township, anybody, unable to afford to mitigate directly attributable, irresponsible, adverse impacts within the environment we share?"
'irresponsible' - according to who? - regional councils set the environmental rules urban and rural populations operate/live under so any 'irresponsible' behaviour would be in breach of consents/Rules and therefore subject to possibility of prosecution, would it not?
Answer - (a) because a vast number of water quality issues are legacy issues of previous generations - urban and rural.Their behaviour is only now considered 'irresponsible' due to hindsight.
(b) how do you prove what each farm/house etc is responsible for and how do you prove that, other than discharge straight to water, what is directly attributable to whom? (Factually, not emotively) Especially given effective lag times of 80plus years on some waterways.
(c) In many waterways the individual catchment water nutrient loading is currently unknown. So what is the sustainable loading for a particular catchment waterway? What is the current loading? Is the catchment nutrient/sediment limited or not? If so which nutrient? Without this information you cannot start to work out which measures need to be taken and who the 'polluters' really are.
(d) Recent Regional Plans that I have read require environmental mitigation to be taken as part of the consents process/approval. So does not that equate to currently polluters pay? It doesn't necessarily address legacy issues though.
'and appears to be handing on problems...'.
perception says it's so, so it must be? ;-) Dairy does have varying degrees of responsibility for water degradation nationally, but that is no reason for MSM etc to imply all dairy everywhere has the same level of responsibility for degradation. We need to be having specific conversations at a local level regarding local water quality issues.
In Central Otago the District Council has recently spread the cost of individual sewage/water upgrades across all the district users of those services. So the people of Alexandra, Ranfurly, Naseby etc are contributing to the Cromwell sewage system upgrade, and the people of Cromwell, Roxburgh, Ranfurly etc are contributing to the cost of the Alexandra water supply upgrade. Individually these communities are small and are likely unable to meet the costs of modern systems required to meet environmental and quality standards. Under your polluter pays systems, some of the Central Otago communities would disappear as residents would no longer be able to afford to meet the costs of infrastructure upgrades e.g. Naseby. By everyone sharing in the cost (helping your fellow man) our communities will survive and the environment will also be better off.
Some Regional Council Plans I believe are now addressing mitigation as the responsibility of consent holder/applicant. This will result in behaviour changes where individuals are concerned. Good Management Practice and/or Farm Environment Plans are also requirements. That takes care of the farming sector - now what of the non farming sector?
There's plenty of money out there - sewers just aren't sexy enough.
$530,000 to investigate why Southlanders roll their Rs.
http://www.stuff.co.nz/national/86079559/530000-to-investigate-why-sout…
ASB economists might be feeling a little smug round about now https://www.odt.co.nz/business/dairy-price-rises-needed-maintain-foreca…
The estimate from Fonterrra of the seasons production in the article is probably even more significant than the auction news. -6.8% is VERY significant. That will have a huge effect on the tradable volumes for the season and hence the price. It also points to how poor a start to the season many in the north island are having, breakeven may have been down for last season but for many it will be significantly higher this year.
Possibly Badrobot, but dairy farmers had the opportunity this afternoon to lock in their pay-out in the milk price futures markets at $5.95. Think many did, no.? Most won't that've taken the time to understand the basics of how to do so (and it is pretty simple) and the rest will get greedy and not care to possibly miss the opportunity of $6.50. Almost deserves a return $4.50
It's pretty simple for those that have a certain degree of financial literacy and the time to 'play' the futures market. For those with only a basic level of financial literacy it is not simple. https://nzx.com/files/static/cms-documents//Guide%20to%20MPF&O.pdf
Bankers have told me that they are not that willing to lend farmers extra debt to play the futures market - around $450,000 for a 200,000kgms farm, was suggested.
Open Country Dairy offered Guaranteed Milk Price(s) for this season - they were oversubscribed. It is not about greed of missing out - for some there are other options.
If their production is down and costs are up (using more bought in feed due to the wet) there won't necessarily be any real surplus to pay down debt. The season isn't over until autumn is finished. Getting on a high just from one auction when predicted payout is riding on a price of $3000/t by Christmas and production on some farms is well down, is a bit like counting your chickens before they hatch. Good news, but not yet time to celebrate.
I am still with the conspiracy that Fonterra knew calf milk powder was going to run dry. Indeed they wanted it to run dry. I have heard that despite the fact it ran dry they did not make more for the NZ market. Instead sticking to fulfilling an export order. This of course resulted in dairy farm rearers dipping into their vats. Feeding calves is a significant drain on the milk supply. Last season Fonterra offered $15/bag off calf milk replacers for fonterra suppliers, this year it was $10. But the product was another $10 cheaper to everybody. They got every calf rearer and their dog suckered in. Then whoomph.....nothing anywhere for anybody. Fortunately I always order early. But there will be many many rearers caught out. It was disgraceful. It had to be blindingly obvious to Fonterra what was happening, more orders in August than they had in storage, yet they put out no warnings. They have their dip in production. They have their rise in price. They lost their NZ customers trust.
Probably more than 100,000 calves were transitioned to meal early. Far too early. How do you do that without them suffering. What do you do if you buy a calf get it home then cant get milk powder. I cant imagine what people did.
The emails between John and the dutchman
If we could just get our production down John our milk price would go up
Heh Theo do you know it takes 6 litres of milk per day to feed a calf
Um yea ok thats interesting John
Yea but do you know how many calves are reared each year
Um a million mebe John
More Theo. What if we could get them to drink more milk?
Um John how?
I have a cunning plan Theo
That sounds plausible but there is another conspiracy theory doing the rounds that the milk powder was incorrectly formulated and calves were dropping like flies... On the other hand going by the price of feeder calves this spring it could just be that every woman and her dog decided to rear some calves.
Your last sentence could have some truth to it Doris. I know of a few farmers who reared a lot more calves this year - they ran beef bulls longer last mating season with a shorter AB season. Consequently they had substantially more beef calves this year and have reared most of them on. I don't know how this is played out nationally so they may be outliers.
Some young farmers were working out the cost of powder v vat milk price on a protein basis and the calf powder won, so used powder rather than wholemilk.
Was it only Ancalf that was in short supply or all brands?
Cas Ob weaner numbers at the Frankton saleyards are more than double normal this year. It could get ugly. But I read somewhere all these extra calves should get snapped up no problem. I guess the weather will have a big say in that. I hear you are getting a dream run in Southland.
Yes Belle we are having a good run. Some farmers I have spoken to say its the best for 20years. So we are potentially expecting a wet summer - contrary to popular perception we don't get the majority of rainfall in winter - it can be almost as wet over summer, and as nature has a way of evening things out........... But we will enjoy it while we can.
In all seriousness, I do think it's a good time too purchase a dairy farm, things have been tough for that sector last few years.
But as swings and roundabouts go, so do boom, bust cycles.
The gloom from dairy is fadeing, do you guys agree?
I think a dairy farm offers good investment opportunity now.
Auckland property investors may go a Rural, I like Taranaki as a dairy investment.
That province is traditional dairy, and doesn't suffer from the environmental effects as much as places like Canterbury. Taranaki the new dairy investment capital?
I reckon!
Give me your views people.
In all seriousness, I do think it's a good time too purchase a dairy farm, things have been tough for that sector last few years.
But as swings and roundabouts go, so do boom, bust cycles.
The gloom from dairy is fadeing, do you guys agree?
I think a dairy farm offers good investment opportunity now.
Auckland property investors may go a Rural, I like Taranaki as a dairy investment.
That province is traditional dairy, and doesn't suffer from the environmental effects as much as places like Canterbury. Taranaki the new dairy investment capital?
I reckon!
Give me your views people.
If you keep things in short supply, then people think you have to pay more for the privilege of ownership. A capital gain is in the making.
But beware, it is all illusory. What can be forced up, may be kicking the can down the bloody road.
Same with houses, same with calves, etc....same with almost everything.
Especially if the interest rates are forced down as they have been the past 8-9 years, it gives the impression that less is more....when costed out....when more is less.
This sleight of hand is designed to fool the masses. And it does.
Don't think twice, its all right.
Double or quits.
Inflate beyond the point of redemption.
Milk it to the extreme.
I could go on...but then you might have to understand.
A fool and his money are soon parted.
One mans debt, one mans meat, one mans lively hood.
And all at a cost to our society.
The pillaging of the 95% for the interest of those in the know. When worked out in trillions, instead of millions, any fool can be a millionaire. But only Billionaires, win.
So get back to work...ye idle bastards. Idle hands do not make light work. Graft does.
And I do not mean ....working.
Bwankers can can lend money at the drop of a hat and an interest rate is the difference between right and wrong and and where borrowed and lent, and always will be.
What's the chances off northern hemisphere farmers upping production with the large stockpiles of cheap grain and corn now that it appears milk prices are rising? Let's face it, the auction price has only risen because of NZ poor spring production. Europe can and will fill that production gap very quickly.
Something has to give "domestic wheat stocks are at least three times larger than they were in 2006. The record volume of wheat in storage is estimated by the U.S. Department of Agriculture at approximately 111 million tonnes, but some groups peg this number as high as 250 million.
China’s wheat stockpile has artificially inflated world wheat supply, and with the state purchase price of wheat remaining intact through 2017, this problem will endure – or worsen.
More than 85 percent of China’s wheat consumption is for food, seed, and industrial purposes, but use in these categories has remained flat for 30 years at around 100 million tonnes."
Chinese dairy imports
http://www.attenbabler.com/chinese-dairy-imports-update-oct-16/
That looks disappointing Aj. Hows the season going in the Bay? Pretty good here. The big stock have done really well, the calves not so flash. Too wet. Speaking to a stock agent yesterday he said he has never been so nervous about the market as he is right now. Everyone seems to be worried if Trump gets in. Personally I fear Crooked Hills and her gang of thieves more.
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