Difficult balancing act protecting farmer incomes
DROUGHT IN the US and New Zealand economics are coming together in a delicate dance that could affect returns to Kiwi farmers.
Most dairy commodity prices are now only marginally down when compared to the same time last year, excluding butter which is trading 20% lower than last year’s levels.
Spring has made a positive start in the southern hemisphere in both New Zealand and Australia where milk production was higher during the early parts of the growing season. In contrast, supply is trending lower faster in the Northern Hemisphere; milk production growth was negative for the European Union and the US during September. Unfavourable weather and reduced profitability due to rising costs will continue to crimp milk production short term.
Given the emerging signs of a supply contraction, international buyers continue to take the opportunity to stock up for short term requirements. In particular, import demand has been positive in China and some key markets in South East Asia and the Middle East. Peak milk flows in New Zealand have generally arrived earlier and have been more easily accommodated in comparison to the gas pipeline disruptions that plagued 2011. Milk production continues to track about 6% higher season to date.
However monthly growth rates are easing year-on-year particularly in the North Island. Dairy commodity prices moved higher through October assisted by a modestly lower NZD/USD exchange rate to sit below the same period last year.
Dairy futures are pricing in an ongoing price rise right through to the May 2013 contracts in both the whole milk powder (WMP) and skim milk powder (SMP) markets. The Fonterra TAF (trading among farmers) prospectus was issued in late October and has stimulated much interest; the Fonterra Shareholders Fund will price and allocate the units in the fund on November 27, a date most dairy farmers will have locked away in their diaries. A lot is happening in New Zealand dairy markets; most indicators are pointing towards the positive with strong milk production and stronger commodity prices, while Fonterra breaks new ground with the TAF rollout.
In Australia, national milk production has increased year-on-year by about 2.1% in the year to October. Northern Victoria remains the standout region with milk supply up strongly. In Gippsland milk supply is slightly down so far this season with extended wet conditions cutting pasture growth rates.
The Australian dollar remains high with levels holding above parity with the US dollar. However subtle improvement in commodity prices (in USD terms) did improve the overall export returns to processors though October. Australia is in the peak selling season and the firmer tone to the markets would be welcome news. October brought some cashflow relief for farmers following a round of step-up in farmgate prices.
The latest round of step-ups brings the average southern export region prices to A$ 4.0 – 4.80KG milksolids.
• Francis Wolfgram is an independent financial analyst with BA in economics including 15 years experience in the financial markets working for some of the world’s largest institutions. This email address is being protected from spambots. You need JavaScript enabled to view it.
