Saturday, March 30, 2024

Modest improvement in returns expected next season

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The 2015-16 season is expected to deliver better returns than the current season but the milk price will still be modest. AgriHQ is forecasting a $6.50/kg milksolids (MS) milk price for next season. This assumes that whole milk powder (WMP) prices will be back to US$3300/tonne and an average exchange rate of US$0.73 will be achieved across the season.
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In historical terms a $6.50 milk price is slightly above the average. In the past eight seasons the milk price has averaged $6.40/kg MS.

Dairy commodity prices are expected to improve a little in the coming 12 months, but it certainly won’t be plain sailing. There is no doubt that the long-term outlook for the New Zealand dairy industry is very positive as global demand for dairy products is expected to continue to grow. However, returns will continue to be very volatile and farm businesses need to recognise this risk and plan accordingly.

At present global milk supplies are ample to meet current demand which is subdued primarily because of China buying less than in previous years and Russia being virtually out of the market. This situation will reverse at some point but it will take time for markets forces to reach equilibrium again. The slow-down in supply from NZ will help the situation but this is likely to be offset by a surge in milk supply from Europe as the quotas are removed.

Milk prices are not really strong enough in Europe to warrant large growth in milk volumes but much of the onfarm investment and planning was done well before prices fell. The European milk supply will work itself out over time as the increase in output from efficient producers is offset by a reduction in supply from less efficient producers. But it will probably take a few years for the market to balance itself out.

Dairy farmers in Europe and the United States are slowly being subjected to the same market forces as NZ farmers as these markets start to sell more milk products into the same markets that NZ does. NZ is unique in that the majority of the milk produced is not consumed by the domestic market. Retail prices in any one market are typically more stable than the prices for which dairy commodities trade in the global markets.

Fonterra milk price.

Returns to NZ farmers will vary from season to season to a greater degree than to farmers in other countries. This is why financial tools are being developed to reduce farmer risk. Fonterra’s Guaranteed Milk Price is an example of a risk management tool. However so far the uptake of this tool has been limited and questions have been raised whether it fits with Fonterra’s constitutional requirement to maximise the wealth of its shareholders.

At the dairy commodity level futures markets have been developed to help buyers and sellers of dairy commodities manage their risk. In the US market futures products are also available at the milk price level which provides an opportunity for farmers to manage their risk. This means farmers can effectively lock in a milk price in advance and if they do the same for feed prices then they can guarantee their profit margin.

Within the EU farmers have additional protection from commodity price cycles because of the internal programmes supported by the European Commission. Private Storage Aid compensates dairy companies for removing product from the market during the high production season and returning it when supply is low. The other programme is “intervention” in which the EU central government buys dairy products when prices reach very low levels. The intervention programme has been used only infrequently in recent years as prices have generally been well above the trigger levels. The intervention programme effectively provides a minimum farmgate milk price.

The massive difference between the 2013-14 and 2014-15 milk prices reflects the 12-month milk pricing that most NZ dairy companies use. Large steps in milk prices are something that isn’t seen in most other markets where milk prices vary from month to month. Generally having a seasonal milk price will smooth out the peaks and troughs but this certainly hasn’t been the case in the past two seasons. NZ dairy farmers need to operate financial systems that can withstand periods of high price volatility or find ways to mitigate this risk.

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