Milk yield down, hopes up for price upturn

Fonterra chairman John Wilson says New Zealand milk production has on average jumped 4.6% every year for five years. However, he expects the growth to taper off.

He says with the average global dairy price hovering at US$2200-2400/tonne it is uneconomic to get milk from farms to global markets.

“We believe at the low price [milking] is unsustainable and farmers will respond by cutting production,” he told Dairy News.

According to Fonterra’s latest global dairy update, EU production in February decreased 1% compared to the same month last year. February was the first month since June 2013 to see a fall in milk production. This decrease was widespread in all the major EU dairy producing countries including Germany, France, Netherlands, UK and Poland.

Fonterra’s milk collection in Chile is currently down due to seasonality of production and drought in the south. 

Milk production in Russia is also down as poor profitability has caused a contraction in the dairy herd, in particular on small farms.  

The drop in milk production will eventually squeeze supply and help prices rise.

But Wilson cannot say for sure when prices will start to turn around. “We said in December that prices would turn around now but this hasn’t happened; now we think it will take another six to 12 months.”

Wilson says Fonterra’s opening milk forecast price of $5.25/kgMS is the best estimate of how dairy prices will play out in the next 12 to 18 months.

Demand for dairy is holding reasonably well despite an influx of milk over the last 12 months. Wilson says there is no real build-up of stocks around the world. “Our customers are holding well, there’s a lot of demand for milk.”

Wilson agrees that even with an opening forecast of $5.25/kgMS, many farmers will be struggling to break even.

“We know there is more pressure on the already tight cashflows on farms, but farmers understand the level of volatility out there. Last season was a very difficult one and hopefully we will have a better season.”

Federated Farmers Dairy chairman Andrew Hoggard agrees with Fonterra that there are some signs of the overseas markets picking up. 

He believes Chinese buyers will be back in the market a bit more vigorously than before, as they need to restock inventory.

“But there are few signs the Russian trade standoff with the United States and Europe over Ukraine is going to end anytime soon. At some stage the Russian government will be looking at alternative dairy supplies which may not come from Europe or America because the Russians won’t put up with going without dairy products for ever.  That will help international prices for all producing countries,” Hoggard says.

“The critical long term factor in our dairy industry is that world dairy consumption is continuing to rise steadily.  That fact gets obscured by the violent fluctuations brought on by war and politics.”

He says the huge price volatility over the past two seasons makes planning and budgeting for farmers hugely difficult.

“Farmers used to be somewhat protected from the ups and downs of the marketplace when we had producer boards to smooth our farmer payments.  That’s all gone now and farmers are on their own.”

Hoggard says that means it’s vital for individual farmers to get good advice from many quarters. “Not just advice on how much fertiliser to use, or whether to get in supplementary feed, but also taking care of y ourself, your family and farm staff.  It’s going to be tough times ahead and people need to look after each other.”

Hoggard says the banks need to appreciate their interests lie in a long term view of the industry.

“That price volatility is a fact of life, not an aberration. Everyone, and especially the banks, needs to understand this and work with it.” 

GDT down, again

Last week's Global Dairy Trade auction saw the average dairy price index drop 2.2% to US$2,412/tonne, its sixth consecutive drop.

Whole milk powder, New Zealand’s premier dairy export, dropped 3.1% to US$2,309/tonne.

All other commodity offerings were also impacted- skim milk powder dropping 1.3% to US$1982/t.

Butter saw the biggest drop- down  10% to US$2619/mt.