Dairy farmers and the Treasury will be looking to 2015 and beyond with some trepidation after a 52 per cent decline in wholemilk powder prices over the past 12 months.
For the average Fonterra dairy farmer, the current $4.70/kg farmgate milk price forecast will not cover the cost of production this season, economists estimate.
Compared with last year’s record farmgate milk price of $8.40, the current year’s forecast will represent a $6.1 billion fall in farm income, or 2.7 per cent of GDP.
The Treasury, in last month’s fiscal update, said its forecasts were based on a 25 per cent recovery in dairy prices taking place in 2016.
Going on the results of the last international dairy auction for 2014, which showed only a modest improvement in prices, the market has a way to go before Fonterra’s and the Treasury’s forecasts become a reality.
Or, as ANZ put it, «a long road lies ahead and a nervous wait ensues for dairy farmers».
The popular wisdom in the sector is that farmers can handle one year of poor prices, but not two.
Rabobank, in its latest quarterly dairy report, said the $4.70/kg milk price would result in many New Zealand dairy farmers operating at a cash loss for the year.
«However, most are starting from a solid starting financial position and have been minimising expenditure wherever possible,» the rural lending specialist said in commentary.
Rabobank said the cash flow crunch would arrive in mid-2015 when retrospective milk payments would be minimal and new expenditure would be required for the 2015/16 new season. However, financiers were likely to support working capital requirements through that period, it said.
Bank of New Zealand economist Doug Steel expects a $4.70/kg farmgate milk price this year, rising to $5.70/kg in 2015/16.
He said $4.70 was not as bad as it looked, because farmers are still receiving «retro» payments from last year’s record season.
«But if it were to stay down at the mid-$4s or lower, those retro payments would run out and it would get significantly tighter for farmers,» he said.
Steel said that despite dairy going through a rough patch, the big picture story – rising demand for dairy products from the world’s emerging economies as they progressed up the protein chain – remained positive.
For the moment, however, the market remains depressed.
Wholemilk powder prices – the most important product for New Zealand producers – last traded at US$2232 a tonne, well below their US$3500 a tonne long-run average.
ANZ estimates that prices would need to reach US$3800 a tonne by next August for Fonterra to deliver on its $4.70/kg forecast.
Higher production, here and in many other dairy exporting countries around the world, has disturbed the supply/demand balance, putting downward pressure on prices at a time of subdued demand from the world’s biggest dairy importer – China.
In the season to date, production in New Zealand has been running 3.9 per cent ahead of last year, but Fonterra expects lower prices to act as a disincentive for production from here on. This season, it expects production to come at 1.6 billion kg – about the same as 2013/14.
Production has been strong in many other countries. In the United States, low feed prices have made milk production far more viable.
In parts of Europe, countries are increasing production in advance of quotas coming off next year and as Russia’s ban on western food products – mostly dairy – continues to destabilise the market.
Compared with the last quarter of 2013, wholemilk powder was the worst performer in 2014, dropping by 51.8 per cent, according to Global Dairy Trade data.
Skim milk powder wasn’t much better, dropping by 47.5 per cent. Over the same periods, butter milk powder prices fell by 45 per cent, cheddar by 34.2 per cent, butter by 28.3 per cent and anhydrous milk fat by 33.1 per cent.
While international dairy markets continue to suffer from low prices, the rate of decline has slowed and low prices have helped clear big volumes of product.
Rabobank believes that, while there are signs of price stabilisation, a recovery may take some time.
China has continued to buy far less than this time last year – with incoming shipments down almost 50 per cent in October year on year as it continues to work its way through excess inventory, Rabobank said.
Meanwhile, Russia’s ban on imports from key suppliers has meant that globally prices have had to fall by 30-50 per cent from their peak, to encourage buying from second- and third-tier importers, such as Southeast Asia, the Middle East and North Africa, to clear the market.
Low prices, compounded in the EU by the risk of superlevy payments – fines for overproduction in the final months of the quota system – should see producers in many export regions hit the brakes in the first half of 2015.
BNZ’s Steel said conditions were improving.
Dairy exports in the United States are starting to track below year-ago levels and a stronger US dollar will tighten conditions on the world market.
«Low prices will have an impact on supply at some point, and there are signs of that happening already,» he said. «Strong volume growth coming through is likely to keep prices soft compared with historical averages, but I think we are starting to see signs of improvement ahead. It’s just a question of when.»
For the average Fonterra dairy farmer, the current $4.70/kg farmgate milk price forecast will not cover the cost of production this season, economists estimate.
Compared with last year’s record farmgate milk price of $8.40, the current year’s forecast will represent a $6.1 billion fall in farm income, or 2.7 per cent of GDP.
The Treasury, in last month’s fiscal update, said its forecasts were based on a 25 per cent recovery in dairy prices taking place in 2016.
Going on the results of the last international dairy auction for 2014, which showed only a modest improvement in prices, the market has a way to go before Fonterra’s and the Treasury’s forecasts become a reality.
Or, as ANZ put it, «a long road lies ahead and a nervous wait ensues for dairy farmers».
The popular wisdom in the sector is that farmers can handle one year of poor prices, but not two.
Rabobank, in its latest quarterly dairy report, said the $4.70/kg milk price would result in many New Zealand dairy farmers operating at a cash loss for the year.
«However, most are starting from a solid starting financial position and have been minimising expenditure wherever possible,» the rural lending specialist said in commentary.
Rabobank said the cash flow crunch would arrive in mid-2015 when retrospective milk payments would be minimal and new expenditure would be required for the 2015/16 new season. However, financiers were likely to support working capital requirements through that period, it said.
Bank of New Zealand economist Doug Steel expects a $4.70/kg farmgate milk price this year, rising to $5.70/kg in 2015/16.
He said $4.70 was not as bad as it looked, because farmers are still receiving «retro» payments from last year’s record season.
«But if it were to stay down at the mid-$4s or lower, those retro payments would run out and it would get significantly tighter for farmers,» he said.
Steel said that despite dairy going through a rough patch, the big picture story – rising demand for dairy products from the world’s emerging economies as they progressed up the protein chain – remained positive.
For the moment, however, the market remains depressed.
Wholemilk powder prices – the most important product for New Zealand producers – last traded at US$2232 a tonne, well below their US$3500 a tonne long-run average.
ANZ estimates that prices would need to reach US$3800 a tonne by next August for Fonterra to deliver on its $4.70/kg forecast.
Higher production, here and in many other dairy exporting countries around the world, has disturbed the supply/demand balance, putting downward pressure on prices at a time of subdued demand from the world’s biggest dairy importer – China.
In the season to date, production in New Zealand has been running 3.9 per cent ahead of last year, but Fonterra expects lower prices to act as a disincentive for production from here on. This season, it expects production to come at 1.6 billion kg – about the same as 2013/14.
Production has been strong in many other countries. In the United States, low feed prices have made milk production far more viable.
In parts of Europe, countries are increasing production in advance of quotas coming off next year and as Russia’s ban on western food products – mostly dairy – continues to destabilise the market.
Compared with the last quarter of 2013, wholemilk powder was the worst performer in 2014, dropping by 51.8 per cent, according to Global Dairy Trade data.
Skim milk powder wasn’t much better, dropping by 47.5 per cent. Over the same periods, butter milk powder prices fell by 45 per cent, cheddar by 34.2 per cent, butter by 28.3 per cent and anhydrous milk fat by 33.1 per cent.
While international dairy markets continue to suffer from low prices, the rate of decline has slowed and low prices have helped clear big volumes of product.
Rabobank believes that, while there are signs of price stabilisation, a recovery may take some time.
China has continued to buy far less than this time last year – with incoming shipments down almost 50 per cent in October year on year as it continues to work its way through excess inventory, Rabobank said.
Meanwhile, Russia’s ban on imports from key suppliers has meant that globally prices have had to fall by 30-50 per cent from their peak, to encourage buying from second- and third-tier importers, such as Southeast Asia, the Middle East and North Africa, to clear the market.
Low prices, compounded in the EU by the risk of superlevy payments – fines for overproduction in the final months of the quota system – should see producers in many export regions hit the brakes in the first half of 2015.
BNZ’s Steel said conditions were improving.
Dairy exports in the United States are starting to track below year-ago levels and a stronger US dollar will tighten conditions on the world market.
«Low prices will have an impact on supply at some point, and there are signs of that happening already,» he said. «Strong volume growth coming through is likely to keep prices soft compared with historical averages, but I think we are starting to see signs of improvement ahead. It’s just a question of when.»
Source: NZ Herald
