There are concerns that the 5% increase seen in November is going to overwhelm already fragile markets. As dire as things appear now, they are about to get a whole lot worse once we start lapping the weak first-quarter of 2015 European production.
For me, trying to allocate blame or curse the assistance that European farmers may or may not receive is futile.
Instead, the energy would be better spent on working on things we can control, including trying to discover new markets and opportunities that have surely come about from changes in market dynamics.
The El Nino that was looking so certain as little as a month ago has well and truly abated and the drought conditions of the east coast of the South Island have been broken.
The 6% reduction in 2016 collections has already been challenged by one of the local banks with suggestions a 3% fall is more realistic.
Fonterra’s guidance includes 1.5% percentage points attributable to farmers changing supply to one of the other local producers at the start of the season.
So suddenly the 3% reduction being attributable to Fonterra would only represent a 1.5% decline in national production of about 45,000 tonnes of whole milk powder equivalent, less than a third of what has been removed from GDT in recent months.
An increasing concern has to be the reliance on supplementary feed with palm kernel imports jumping another 10% for calendar year 2015 to 2.2 million tonnes.
Palm kernel has its place, but its popularity has grown in the past 10 years to the extent that it is now responsible for about 12% of NZ’s total milk pool, with farmers seeking to boost the productivity of their herds in order to offset the increasing costs of production.
While the communication may have been clumsy, I do believe that Fonterra were on to something when they attempted to limit the amount of meal being introduced into the cows diet.
Increased intensity does not feel like a game we can win especially when we are up against the might of the European and United States dairy industries.
Jumping into a race to the bottom isn’t an attractive proposition and they certainly don’t award medals for pyrrhic victories.
So farmers are now faced with a critical decision in the coming weeks when considering whether this period of lower prices could be ongoing into a third season (remembering between the 2002-03 season and 2006-07 season the milk price sat between $3.34 and $4.37 so extended periods of weakness are not unheard of).
Do they continue to milk right through and get the most out of the current season, with the additional assistance of supplementary feed if need be or do they dry-off and write this season off as an aberration?
After all, losing a milksolid this season should be gained backed in APC and-or BCS in the coming year.
Typically in this period of low commodity prices we would expect to see relief in the form a weaker Kiwi dollar.
Unfortunately that has yet to play out and post yesterday’s hawkish comments from the Reserve Bank governor, the NZ dollar cross is once again going to place pressure on Fonterra’s hedging policy and ultimately the 2016-17 payout to farmers.
One consolation of this sustained period of low prices could be a permanent move back to a lower cost production model.
Dietary trends are ever-changing but the wholefood movement does look to have legs, with premiums being attracted for food produced from the land, be it organic or in the case of dairy, grass-fed.
Of course, it is currently a niche market but really that is what NZ is all about. We dominate a game the rest of the world knows little about, we make movies that seem impossible to produce and climb mountains just because they are there.
Niche comes from being one of the most isolated countries and if its grass that the world wants surely there is no one better at producing it.
NZ exports currently represent 25% of the globally traded market but only 2.5-3% of total production so Fonterra’s desire to increase its participation in the consumer and foodservice markets at the expense of commodities makes perfect sense.
I hope the strategy begins to start paying dividends quickly because the farmer’s predicament is looking ever more precarious.
• Mike McIntyre is head of derivatives at NZ First Capital
