Low farmgate milk prices are now affecting New Zealand’s milk production. Even though, in the absence of widespread drought, there was a stronger first half production for the 2015 year (1.1% above 2014), this will not be enough to prevent milk production for the whole year decreasing to an estimated 21.39 million metric tons (MT).
Cow numbers are declining, estimated to be 75,000 head below October 2014 year-over-year. The winter and early spring (June to mid-September) for 2015 has been colder than the last two years, negatively affecting pasture growth. In order to minimize on-farm costs farmers are minimizing the rates of supplementary feeding which is likely to impact on production for the second half of 2015, now forecast to be 5% back on the same period in 2014.
Milk production in 2016 will continue to falter 3% below the 2015 estimate. Low forecast milk prices, reduced cow numbers, and the prospect of an El Nino drought are the dynamics at play.
Less milk supply for 2015 through 2016; and the increased processing capacity now in operation gives the dairy processors better product optionality. It will allow an increased volume of milk at the margin to be switched from one product to another. This has already been evident in 2015 as Cheese, liquid UHT milk, Casein, Whey products, and Milk Protein Concentrates have already recorded increased export shipments. It will have even more of an effect potentially at peak milk flow in October through early December in 2015 and 2016.
New Zealand’s key commodity produced is Whole Milk Powder (WMP) but at an estimated 1.38m MT in 2015 this will be 6% below the 2014 total. As a direct consequence it is likely WMP exports will also be down. They are now estimated at 1.36m MT for 2015, which would be 4.4% below 2014. This slide is forecast to be halted in 2016 with both production and exports of WMP to be essentially the same as 2015.
The other big mover is cheese. Production for 2015 is now estimated at 347,000MT, seven% up on 2014. Year-to-date export data, shows cheese exports are 20% ahead of the same period in 2014 and cheese prices during 2015 have been at enough of a premium over WMP to justify extra production. Total cheese exports for 2015 are forecast at 319,000MT. This situation is likely to reverse in 2016 as the price relativity between WMP and cheese starts to favour WMP again. For 2016, cheese production is forecast at 310,000MT and exports back to 2014 levels at 278,000MT.
WMP production slowing, cheese up for 2015
At 1.38m MT, production of WMP in 2015 is likely to be 6% down on the previous year. Exports are already 40,000MT behind for the year-to-date (YTD) July compared with 2014 and it is very unlikely that stocks were building up by mid-year.
Cheese production for 2015 is now estimated at 347,000MT, 7% up on 2014. Production for 2014 has now been adjusted upward in response to the rate of export shipping in the first quarter of 2015 which would have been enabled by a run up in cheese stocks at year end 2014. The run of increased cheese production is not expected to last. The slow down in milk supply in 2016 and the likelihood other commodity price relativities will catch up with cheese is likely to mean production in 2016 will be reduced to 310,000MT. This would represent an 11% reduction over 2015.
Since May 2015 the GDT auction prices have favored cheese production. A general rule of thumb suggests that cheese manufacture becomes more profitable than WMP when the cheese price in USD exceeds the WMP price by more than USD500/MT. The chart below shows that since May 2015 the cheese price has consistently exceeded the WMP price by more than USD500/MT. Export markets for cheese open to New Zealand are finite which means changes will be marginal rather than a significant diversion of the milk supply to cheese.
SMP prices are very low now both absolutely and relative to WMP and Cheese. The only reason the value of the manufacturing combination of SMP and AMF/Butter hasn’t sunk lower relative to WMP and Cheese is the strength of butter and AMF prices. SMP production in 2014 has been amended upward to 415,000MT to show an increased ending stock number of 113,000MT which has fueled a higher rate of export shipping in the first half of 2015 than was expected. However it is expected that SMP production will be reduced by 13% in 2015 to be 360,000MT. The protein side of cream/fat production is being further processed to Casein, Whey and Milk Protein Concentrate production in 2015. This isn’t likely to be the case in 2016 but it is not expected that SMP production will improve and it is forecast to sit at 360,000MT again.
40% of lactose coming from U.S., for now
Used to standardize WMP production, lactose imports have grown from 76,477MT in 2012 to 102,567 MT in 2014. This includes MPC from USA which is actually lactose made as a by-product from the MPC manufacture process. 41% or 42,213 MT of the total volume in 2014 was sourced from the U.S. Lactose makes up approximately 10% of the volume of WMP. So the amount imported standardizes approximately one million metric tons of the total WMP produced. There is still some WMP produced un-standardized as the amount of lactose available domestically would not cover the balance of WMP production.
But two new Fonterra facilities will have lactose as a by-product; their new MPC facility on the South Island as well as their whey/lactose processing site next to a Royal A-ware cheese plant in Heerenveen,the Netherlands. Both began operation in 2015, and could begin to compete with US imports, especially while WMP production is reduced over the next 18 months.
However so far in 2015 there has been no letup in the rate of lactose being imported. Up to July 2015 41,609MT had entered which was 2% up on the same period in 2014. The US supplied 63% of the volume.