Friday, March 29, 2024

Opinion – Tough times continue

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With the latest GDT behind us and a number of the local banks downgrading their farmgate milk price forecasts it would seem fait accompli that Fonterra follow suit in the coming days.   
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The reduction in milkprice is necessary not only as a means of reflecting the weakened commodity price but also as a tool for signalling to the farmers that the tough times look set to continue. 

The cool Spring followed by and a warm and dry start to Summer had a detrimental impact on pasture growth that looked likely to send the New Zealand market into the grips of a drought, reminiscent of the 2013 saga. That all changed on the first day of the new year with a series of tropical storms that has reinvigorated fields the length and breadth of the country. 

Embattled farmers have seen the recent rains as manna from heaven and would have undoubtedly shelved any plans for an early end to the season. 

The current guidance for collections being down 6% is now under threat, at a time when it was one of the few bullish stories for global dairy pricing. A reduction in pay-out would see NZ farmers once again forced to take a look at how they are producing (potential for further culling of stock) as a means of adjusting for the lower income levels.

Offshore It’s been encouraging to see the increase in the contributions to the European Intervention (IV) programme and also pleasing to hear that some of the European producers have been actively been dissuading their suppliers from increasing collections, but I fear it will not be enough. 

To see November collections up over 5% is concerning, but more troubling is the impact on the first quarter collections (Jan to Mar) as we approach the European flush. 

The El Nino has also impacted the West Coast of the US with welcome rains arriving in the drought stricken Golden State. California is not only the largest US dairy producing State (~20Bn Litres – roughly the same size as the entire NZ market) it is also the largest producer and exporter of powders (the major component of the farmgate milkprice). 

While a lot of the product will heading across the border into Mexico there is also likely to be offers being made into the SEA and Chinese markets. Today’s GDT result also impacted on CME prices with a number of NDM contracts settling at or near limit down – opening a large discount to NZ pricing.

The question now has to be what happens going forward.  

The futures have opened weaker than their previous close, suggesting that either the market took last evening’s result as being more bearish than what it was expecting or perhaps there is concern with the impending auction, given WMP volumes in TE157 are up 30% on those offered last evening. 

The demand side of the dairy equation remains uninspiring with issues such as crude weakness impacting those oil exporting nations from steeping up and building inventory.  

Of course the situation remains fluid but any turn around in fortunes has to be quick with just 7 GDTs remaining  before Fonterra are to provide their initial forecast for the 2016/17 season. If the prices in late May are sitting anywhere near existing levels then it would be difficult for Fonterra to produce a pay-out that would exceed the average farmer’s break-even for the third year in a row.  

 

Mike McIntyre is Head of Derivatives, First NZ Capital

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