Record milk price!
A record farmgate milk price for Fonterra shareholders is all but confirmed for this season.
Open Country Dairy chief executive Steve Koekemoer has told farmer suppliers this indicates dairy prices have hit bottom and recovery is imminent.
In the company’s August newsletter to suppliers, Koekemoer admits it is difficult to take any positives out of the current situation facing farmers.
“It may be a bit premature, but post the last GDT event we have started to see some increased activity from the market,” he says. “This indicates that we might have arrived at the bottom of the cycle and see recovery over the next few weeks.
“It’s a tough call and will be a long road but hopefully some light at the end of the tunnel starting to show. The next two GDT auctions will be key; all eyes will be on it to confirm an upward trend.”
He says milk powder prices remain below acceptable levels and are impacting forecast payouts by processors.
After 10 consecutive falls in the GDT price index, the Aug 19 GDT auction saw a 14.8% rise; NZ’s major export, whole milk powder, was up 19.1%.
Koekemoer says the WMP price bounce-back offsets some of the massive falls in the past trading events. He believes the big driver for this has been the reduction of product available and NZ announcing a drop in milk supply for the 2016-17 season.
“With supply currently still reported to be high around the globe, customers have not had any signals to increase demand until this point. Clearly, this is not only a NZ issue as other exporting countries cannot compete at current prices. They are also finding themselves in a difficult position and having to reduce their milk price accordingly.”
Koekemoer expects to see more EU product going into intervention, removing product from the market.
“The current supply/demand matrix is a real concern for dairy as a whole and one that can only be corrected by bringing this back into balance.”
Like other dairy companies, OCD was also forced to reduce its payout to farmers. It has revised its advance rate for September-October to $2.55/kgMS. It has also adjusted its full-year forecast to $3.50 - $3.80/kgMS.
To help farmers the company settled its previous season final payment early -- on August 3, “to help in… very difficult times. In addition to this we have also split settlement period 1 of the 2015-16 season, again to return this money to our supply base earlier”.
“We will settle June-September milk in November, and October milk will be paid in full in December. The other settlement periods remain as normal. We will continue to assist in this regard where possible as we proceed through the season.”
Less milk coming
Open Country Dairy has reduced its milk production forecast for the season by 5%.
Chief executive Steve Koekemoer expects a similar drop among other dairy companies.
“Although this is early in the season, we owe it to the market to indicate our likely drop in supply,” he says.
The expectation is that UK milk supply will also drop after the grazing period due to feed costs and increased culling rates.
China, NZ’s largest market, continues to be weak, because of low consumer demand and the use of internal milk. Some larger processors in China are seemingly being pushed to use local milk to prevent dumping even though it is 300% more expensive than imported product. Any surplus milk is also being spray dried to use later to protect local supply.
The much higher local milk costs impact their processing costs which are then passed on to consumers and impact overall consumer demand, he says.
“This will work through the system and demand will outstrip supply in the long term once inventories are reduced.”
