Friday, March 29, 2024

Focus shifts to next season

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As the 2015-16 dairy season draws to a close the focus moves to next season.
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The AgriHQ 2016-17 Farmgate Milk Price forecast is $4.45/kg milksolids (MS). There are a wide range of views in the market regarding next season’s milk price, which isn’t surprising.

The milk price is largely determined by two factors – dairy commodity prices and the exchange rate.

The value of the New Zealand dollar is difficult to forecast. Our currency is one of the 10 most-traded in the world because of the relatively high yields on offer in NZ and the lack of government intervention in the market.

The NZ$:US$ rate is determined by the market, which is influenced by a large range of global factors, none of which are easy to predict. Dairy commodity prices are also very volatile and difficult to forecast with a high degree of accuracy.

The dairy commodity market is still over-supplied. Most of the excess supply from the northern hemisphere is being put into storage. Domestic prices and-or government support programmes are providing more lucrative returns than export markets. In the southern hemisphere milk supply is seasonally decreasing and supplies are tightening.

This has helped the globally traded dairy market become more balanced in the short-term, and is one reason why prices lifted at the April 19 GlobalDairyTrade event.

But for a longer-term, sustainable lift in dairy commodity prices, global supply and demand must become more closely aligned.

This is likely to happen through a reduction in milk supply and an increase in consumer demand. So far global supply has been slow to react because the market signals northern hemisphere farmers are receiving have been supported by the strength of their domestic markets.

Eventually the growth in supply will reduce to a rate which allows demand to catch up.

Based on the volume of milk being produced and the volume of product being stored this rebalancing is unlikely to happen until 2017. By that time most of NZ’s 2016-17 milk supply will have already been sold. This is why we are not confident that dairy companies will be able to pay their suppliers much more for milk next season than they have this season.

In late April the NZX Dairy Futures market indicated whole milk powder (WMP) prices would lift as the year progresses. The market has the January 2017 WMP Futures contract priced at US$2450/tonne. The prices for the dairy futures contracts which trade on the NZX market are used to calculate the AgriHQ Farmgate Milk Price.

Interest rates in NZ are high by world standards. This is attracting more money into NZ, which is pushing up the price of our currency.

The Reserve Bank is progressively lowering the official cash rate and we could soon hit parity with Australia but interest rates in NZ are still considerably higher than those of the United States or Europe.

In some European countries if you make a short-term investment you actually have to pay the bank to look after your money.

The US federal funds rate is 0.5% but is forecast to lift to 1% before the year ends. As interest rates in the US rise the incentive to put funds into NZ currency will decrease and this should take some of the upwards pressure off the NZ dollar. But the NZ dollar remains a difficult currency to forecast. At present we are using a rate of US$0.67 in the AgriHQ 2016-17 milk price forecast.

However there is upside risk in this forecast. If the NZ dollar remains strong this will put upwards pressure on our forecast exchange rate, which will in turn negatively affect the milk price.

The price Fonterra is able to pay for its milk is likely to benefit from its recent cost-cutting measures.

While Fonterra’s milk price is theoretical, many of the costs used in its model are based on actual costs the company incurs, so there could be some gains to be made from Fonterra operating a lower-cost structure. Exactly what these gains will be isn’t yet clear but they are unlikely to add more than 10c to the milk price. Some of the measures will be eroded by the reduced milk supply because fixed costs have to be spread over a smaller milk production base.

The AgriHQ milk price calculates Fonterra’s costs based on a three-year rolling average, so the recent measures haven’t been considered in the calculation.

The AgriHQ milk price calculator has been designed to allow users to do their own scenario testing.

You can plug in your own assumptions for dairy commodity prices, the NZ dollar, and costs and see how they would affect the milk price.

To access the AgriHQ milk price calculator go to the “Tools & Calculators” section of the AgriHQ website agrihq.co.nz.

• Susan Kilsby is an AgriHQ dairy analyst.

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