Prospects of the full season milk price starting with a five are now well and truly receding.
Most commentators are in the mid $6 range, apart from the wildly optimistic NZX calculation of $7.14, and are in line with Fonterra’s thinking.
Fonterra’s thinking has translated into action and its a good news story.
It has narrowed its forecast range by, most importantly, lifting the bottom by 50 cents to give a mid point, on which it bases advance payments, of $6.40. That’s a big clue of where it expects the season to end. Remember, it won’t want to hand out more than it can afford and incur the wrath of farmers.
Another clue in Fonterra’s and farmers’ actions is the $6.85 for the July fixed milk price offer. That was overwhelmed by eager farmers and with only 15 million kilos available the volumes farmers ended up with were scaled back to 22% of their application.
Given there’s an element of speculation in the way the fixed price is set, with milk futures contracts having a big role, farmers clearly regard it as a price to be snapped up, suggesting they and probably Fonterra reckon the price will settle somewhere between $6.40 and $6.85.
Farmers, apparently, will try to compensate for the lower prices by increasing production.
Rabobank analyst Wes Lefroy expects the lower commodity prices won’t cause major cashflow issues or on-farm cost-cutting but they will encouage farmers to maximise pasture and focus on home-grown feed using more urea to bolster growth. Fertiliser prices are at 10-year lows and pasture growth remains below normal, further encouraging urea use.
So setting farms up for the peak production and lengthing it will be at the forefront of farmer thinking.
However, it will be prudent for the industry to look beyond this season.
Covid and droughts followed by too much rain are not going to make life easier for the foreseeable future. Farmers will want to set themselves up for reliable, flexible systems that can adapt quickly to whatever conditions climate change brings.
We see how quickly things can change. No one at New Year parties was talking about covid. A month later we were talking lockdown.
We must also consider what we produce, where we are going to sell it and what story we are going to tell about it.
The last of those is fairly easy. The story we want to tell is mostly written.
The other factors, however, are not so easy.
While we can relax a little about prices other data from the Global Dairy Trade auctions show there is still much volatility and sudden, violent ups and downs are apparent.
The July 7 GDT had a jump in the index of 8.3% but whole milk powder shot up 14%. Wow. That caused the NZX milk price calculator to climb 40c to $7.10. If only.
On July 21 WMP held its value, demand for infant forumla is holding up and China is buying but butter lost all the ground it had made up.
There are also big geographic fluctuations to contend with. Demand from north Asia, mainly China, was up 14% and accounted for 60% of sales but demand from southeast Asia was down 21% and the Middle East was down 43%.
That’s just some of the suff we know about.
Then there’s the your guess is as good as mine stuff like what will happen as a result of the squabbling between the United States and China. The last thing we need now is to be caught up in that nonsense and, even worse, in a situation where we have to choose sides. It might sound frivolous but the fallout between these two has the power to create global chaos, especially if the US uses its financial clout to stop third countries trading, as hit has with Iran.
