Good times return
Following several years of pain, farmers and growers are facing a decent upswing in commodity prices, say economists.
A record $9/kgMS milk price is becoming a real prospect – but rising costs will slash profit margins.
Strong demand and tight global supply, including soft domestic milk production figures, are putting upward pressure on prices.
However, costs – both on and off farm – are rising, threatening profit margins.
BNZ senior economist Doug Steel says price rises on Global Dairy Trade auctions over the last few months mean a record milk price, beating the 2013-14 record of $8.40/kgMS, is highly likely. But he points out that this doesn’t mean “a record price in real terms”.
Rising costs mean it won’t be a record profit for most farmers. However, strong revenues from the high milk price will mean a reasonably profitable season.
“Even if GDT prices are maintained at current levels going forward, there’s a reasonable chance of a $9 milk price this season,” he told Rural News.
But Steel warns that we’re living in a world “with many moving parts”. International fertiliser prices and shipping costs continue to rise. On farm fuel and contractor costs are soaring, while interest rates also on the up.
“Farmers are doing their best to manage costs, but while revenues are strong, the high costs take the gloss off the bottom line to some extent,” says Steel.
BNZ is forecasting a milk price of $8.90/kgMS – the top end of Fonterra’s forecast milk price range of $7.90 to $8.90/kgMS. The co-operative is expected to upgrade its forecast when it releases its first quarter results on December 3.
Steel says there’s a strong chance Fonterra will revise its forecast price range. He notes that since the co-operative’s last upgrade, international dairy prices have risen 7%.
Milk production is up nationally, despite drought conditions beginning to bite in some districts, according to the latest update from Fonterra.
Dry conditions are widespread but worse in some places, with rain and drought affecting farms just a few kilometres away.
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The divestment process for Fonterra's global consumer business is gaining momentum, with the co-op meeting global fund managers this week on a potential listing of the co-operative's newly formed Mainland Group.
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