Happier dairy days ahead

 Federated Farmers Waikato Dairy chairman Chris Lewis says a few more rises in the Global Dairy Trade (GDT) auctions will allow farmers to “hit the happy place for a while”.

Lewis says the positive in Fonterra’s decision last week to hold the milk payout at $4.70/kgMS was that the payout wasn’t reduced.

With most of the milk from this season processed and sold, Lewis says farmers are turning attention to the next season, starting June 1.

“Not only farmers but the banks and the business community are looking forward to the next season with confidence; we don’t expect a record payout but a middle range figure,” he told Rural News. “Farmers expect prices to hit the happy for a while.”

But for this to happen, GDT prices must continue to rise; since December, GDT prices for whole milk powder have risen 45% and skim milk powder prices 13%. WMP prices are hovering at US$3272/tonne and WMP US$2744/t.

Fonterra chairman John Wilson says the increase was not sufficient to raise the forecast milk price now.

On the coming season, Wilson says it’s difficult to predict prices so far ahead. “There is so much volatility, we are finding to difficult to forecast on a week-to-week basis, let alone 18 months.

“Significant volatility [continues] in international commodity prices. New Zealand volumes are down, with uncertainty in milk production due to… drought in Canterbury, Marlborough, Central Otago and North Otago.”

He says WMP prices must reach US$3500/t by April to sustain the $4.70/kgMS payout forecast.

The ASB Bank, which has lifted its forecast payout to $5/kgMS for this season, says it was “a touch surprised” by Fonterra’s decision.

For the coming season, the bank is forecasting an opening payout of $6.50/kgMS, based on a slowdown in milk supply growth in Australia, the US and Europe, drought in New Zealand and a rebound in demand in China.

ASB economist Nathan Penny says Fonterra has not taken into account the drop in the New Zealand dollar. But he concedes Fonterra’s hedging policy won’t allow it to reap the immediate benefits of the lower dollar.

BNZ economist Doug Steel isn’t surprised Fonterra stuck to the $4.70/kgMS forcast payout. There is too much volatility in the global markets for Fonterra to raise the forecast payout by a few cents and then get caught out by a big drop in GDT prices, he says.

Steel says dairy prices have clearly firmed but he cautions farmers against getting carried away by prospects for next season.

“We have gone from record highs to extreme lows within a few years,” he says. “The next season is looking better but we should not get too excited. Prices will push higher in the coming months and it’s all to do with the drought in New Zealand.

“Weather [permitting], production will recover in New Zealand next season and then further price increases will be capped.”

The BNZ is forecasting an opening payout of $6/kgMS for next season.

But Chris Lewis, Federated Framers, says with rising cost of production, debt servicing and capital costs, farmers need at least $7/kgMS for long-term sustainable business.

“Farmers will be keeping an eye on GDT and hoping the market finds a place for a fair value price; all farmers want is fair value for their hard earned product.”

Lewis says many farmers are struggling this season with $4.70/kgMS. “When the milk cheques arrive over the next six months, there will be a lot of negative financial figures on farms.”

Wilson says Fonterra is mindful of the tight cashflow and the struggles of dairy farmers.

“As a farmer, I know we all want a higher payout but farmers understand the global market dynamics. We are advising farmers to continue to be cautious with budgeting and we will update them as the season progresses.”