The milk price for this season now looked secure at $6 to $6.25/kg milksolids and budgeting for next season for the dairy farm syndicates under MyFarm management would start at $6.
Watters published a note to clients headed Dairy to have at least two good years?
“This season is almost done and dusted and it looks as though the milk price will be higher than Fonterra’s current $6 forecast.
“Hedging will have locked in the $NZ at good prices and just over 75% of product due to be sold has been sold on GDT.”
He thought $6, rather than $7, was a good starting point for next season’s budgets.
Because of the lower cost structures farmers had to use during the downturn, $6 returns were profitable and sustainable.
The MyFarm syndicates, on average, were forecast to generate an Ebitda of $2.64/kg this season despite slightly lower production with the difficult weather.
“At this milk price, dairy farms will be returning to significant profitability as a result of these two good seasons. We no longer need $7/kg to be profitable.”
Watters said the 43 MyFarm syndicated dairy farms, mostly in the South Island, were 1.6% behind last season in milk production.
Chasing milk production was a mirage because extra milk meant supply/demand imbalance, lower prices and higher costs.
Farms needed a cost structure that emphasised all-grass feeding with a little supplementation and that was repeatable for year-on-year weather changes and volatile international dairy prices.
When asked if his overview of prices and prospects suggested a time for re-investment in the dairy industry arranged by MyFarm, Watters said, “close, but not quite.”
“For farmer investors, interest is probably coming back into the market but non-farmers remain cautious and would like to see higher returns yet.
“We are certainly looking (for suitable purchases), whereas we weren’t looking last year.”
But Watters also drew attention to some negative trends mentioned in an early-February blog by MyFarm director and former investment banker J T Macfarlane.
The NZ-born, Melbourne-based commodities specialist was commenting before the latest Global Dairy Trade auction rise of 1.3%, including whole milk powder (WMP) up 1%.
WMP futures prices had fallen across all contract dates, skim milk powder prices in Europe and the United States had fallen about 10% because of the “hangover” of discount intervention stocks and there was considerable weakness in the outlook for the 2017-18 season.
His conclusion was a forecast $6/kg milk price, not $7, Macfarlane said.
“Bottom line, it pays to be cautious in thinking about next season as margins may not be as comfortable as seemed likely six weeks ago.”
AgriHQ dairy analyst Susan Kilsby agreed with MyFarm on the $6-plus outlook for 2017-18 season, though the price for milk futures on the NZX Dairy Derivatives market had fallen 15c recently to be at $6.30.
For this season, milk futures were at $6.20, which indicated the market believed Fonterra’s forecast would move higher and next season would be slightly better for farmers than this season.
Synlait’s increase of 25c to $6.25 last week was also a boost to expectations of a higher Fonterra forecast announcement imminently, she said.
That was because Synlait, as a private company, wouldn’t knowingly expose itself to pay more than Fonterra, the benchmarking co-operative.
