Watters, an executive director of MyFarm group, said New Zealand’s big contribution to the supply of globally-traded milk could be counter-productive.
«I’m not a fan of the New Zealand dairy industry going for quantity because it keeps prices down,» he said.
New Zealand was still recovering in part from a period of «excessive buying» in China in 2013 until the middle of last year.
This country’s whole milk powder represented more than 90 per cent of sales to China during that time, he understood.
Demand for export milk was growing by 2 per cent to 3 per cent a year, but the amount of product traded across borders was only 8 per cent of world consumption.
If the amount of milk being released to markets suddenly rose 4 per cent to 5 per cent, as it might during a «zero period», the amount of surplus unsold milk around the would would quickly grow, Watters said.
In the 2014 calendar year, New Zealand farmers increased their supply 10 per cent in response to favourable growing conditions. They also had a record 2013-14 milk price, which made it profitable to buy feed to boost production.
In the MyFarm newsletter «Farm Investment Insight», Watters and colleague Brian Cloughley recalled a «hero period» of strong demand for New Zealand from June 2013 to May 2014. The country exported 622,000 tonnes of whole milk powder (WMP) to China in those 11 months, an increase of 47 per cent on the previous year.
New Zealand volume over that time accounted for 91 per cent of China’s imports from around the world.
This period of «excessive buying» was still increasing in the first half of 2014, at 530,000 tonnes or an increase of 73 per cent on the previous half year.
But a «zero period» followed as demand for WMP fell sharply.
«In summary, the $4.70 milk price in 2014-15 has been due to two factors; a global market response to additional supply and buying patterns in China», Watters and Cloughley said.
Synlait Milk this month cited Chinese milk-buying patterns as a major in the 2015-16 production year. WMP imports into China were expected to pick up later in 2015. China’s year-on-year milk production growth was estimated at 15 per cent but «high inventory levels are still being worked through».
At the same time, major exporters were supplying their biggest amount of product in eight years. Others factors included competitive pressure from Europe due to weak local currency, weak domestic demand and loss of Russian demand due to its trade embargo on European product.
Supply from Europe was also likely to continue once quotas were removed in April this year.
Watters said prices on Fonterra’s market-setting, fortnightly GlobalDairyTrade (GDT) auctions were largely determined by demand from China and supply from New Zealand.
New Zealand supplied about 55 per cent of global WMP exports and about 50 per cent of the country’s WMP was sold to China. China was also the largest importer of dairy products generally, consuming 1.5 million tonnes of dairy products annually, or 13.4 per cent of global exports.
Watters expected GDT auction prices would «firm» in 2015 because of New Zealand farmers drying off cows early in response to drought and low prices – and China consuming its reserve product.
Chinese dairy would be about 80 per cent to 85 per cent self-sufficient this year, according to estimates he had seen from analysts AgriHQ.
Seven years ago China was totally self-catering, which indicated a growing «input requirement» for imports from New Zealand and elsewhere.
China was able to control demand by choosing whether to take milk from its own farmers, but the country’s average production costs were at least twice New Zealand’s. Sometimes Chinese farmers’ milk was simply not picked up, he said.
New Zealand’s best approach was to maintain its relatively lower production costs so it could keep its strong share of global milk sales, Watters suggested.
The average cost of producing New Zealand milk was about $5 per kilogram of milksolids whereas it was $6/kg in Australia and $7/kg in the United States, he said.
Source: Stuff
