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THE FONTERRA Global Dairy Trade (GDT) auction on February 5 shows a solid rise in the GDT Trade Weighted Index (TWI) which takes in the basket of our dairy products, up 2.4% from the previous auction.
Most of the major product groups were up: the whole milk powder price up sharply at 5.4%, skim milk powder up 0.5%, and butter milk powder up 3.7%; cheese was down slightly -0.1%. The dicyandiamide or DCD issues have done little to curb buyer interest with participating bidders up to 212 from 202 in the previous auction. However, despite the strong GDT prices, challenges are mounting for the New Zealand dairy industry.
The country’s extended drought caused by a hot, dry summer has put pressure on dairy production with likely consequences for farmers’ cash flow and profitability. It also reduces the likelihood of 2013 milk production targets and exports being met. The worst drought conditions are being felt in East Coast regions of both islands in dairying areas most susceptible to drought like Bay of Plenty, Gisborne, and Canterbury. However, production levels are also down in Northland, Waikato and Taranaki because of the dry conditions, with farmers across the country already feeding supplementary food months before they usually do.
The Kiwi dollar’s continued march upwards means real dairy export returns fell 5.3% in the December 2012 month compared to December 2011. With dairy prices expected to be strong due to decreased milk supply here and overseas, fingers are crossed the price rises can outpace the flying Kiwi dollar to maintain our real export returns.
In Australia the 2012-13 seasonal flush has passed with production growth coming in below expectation; unfavourable wet weather in parts of Victoria was the main cause not helped by the dramatic weather in New South Wales and Queensland.
Additional cash flow has been tight due to lower milk prices though they are expected to recover pushing into 2013. Feed costs have shot up and with the carbon tax leading to higher energy costs, producer margins have deteriorated. With the Australian dollar expected to remain buoyant any upside to farmgate pricing will have to come from higher commodity prices in US dollar terms.
Global milk supply is still tight as high feed costs and unfavourable weather conditions continue to take a toll. World milk powder prices have remained stable over the past couple of months however US cheddar cheese and butter prices have fallen by as much as 11.0% and 13.2% respectively on decreased demand. With US butter prices falling, European Union (EU) butter prices are now at a premium over US and Oceania values.
If the gap continues to increase, specifically over Oceania values, there may be incentive for New Zealand to look at exports to the EU as we did in 2011. However, with EU domestic stocks being low, the effect on prices may be limited.
• Francis Wolfgram, BA (Econ.), is an independent financial analyst with 15 years’ experience in the financial markets working for some of the world’s largest financial institutions. This email address is being protected from spambots. You need JavaScript enabled to view it.
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