The GlobalDairyTrade price index dropped 10.8% in this morning’s auction.
This isn’t cause for panic but it is cause for caution.
The dairy market is volatile.
Fonterra’s announcement that it is holding the season’s forecast payout at $4.70 with an estimated dividend range taking it to $4.95 – $5.05 for the current season will have disappointed many after successive increases in the GlobaDairyTrade auction and commentators had suggested an increase to $5.
Chairman John Wilson said that although dairy commodity prices had gone up, the increase was not sufficient to raise the forecast Farmgate Milk Price at this time.
“Since December, GDT prices for Whole Milk Powder have increased 45 per cent and Skim Milk Powder prices have increased 13 per cent,” Mr Wilson said.
“There continues to be significant volatility in international commodity prices. New Zealand volumes are down, with continued uncertainty in milk production due to climatic conditions in New Zealand with droughts in Canterbury, Marlborough, Central Otago and North Otago.
“Today’s forecast reflects the Board and management’s best estimates at this time. We are advising farmers to continue to be cautious with budgeting and we will update them as the season progresses.”
Chief Executive Theo Spierings said Fonterra was sticking to its strategy, with confidence in the long-term fundamentals of dairy demand.
“We will provide a full business update when we report our Interim Result on 25 March,” Mr Spierings said.
Fonterra is required to consider its forecast Farmgate Milk Price every quarter as a condition of the Dairy Industry Restructuring Act (DIRA). . .
Fonterra Shareholders’ Council Chairman, Ian Brown said the Co-operative’s announcement to maintain the 2014/15 forecast Farmgate Milk Price at $4.70 per kg/MS will be a relief for Farmers.
Mr Brown: “On-farm conditions have been really tough throughout the country and Farmers will be pleased that the recent downward trend has stopped.
“It has also been encouraging to see GlobalDairyTrade, and in particular Whole Milk Powder prices, increase significantly recently and given what took place late last year it will go some way to building confidence on farm.”
Mr Brown said that Farmers will be looking with great interest when the forecast dividend is announced at the interim results in late March.
“Our Farmers will want to see the strategy, which is key to adding value long term, deliver a return relative to the significant investment they have made and continue to make in their Co-op.
“In the interim, as always, the Council urges Farmers to be prudent in their financial planning to ensure they place their businesses in the best possible shape for next season.”
There is time for an increase but any is likely to be modest.
Most of this season’s milk has already been sold and while the outlook is more optimistic it is still volatile.
The cut in Fonterra’s payout isn’t good news but it isn’t the disaster that many are proclaiming.
Nor was the timing the political conspiracy that Winston Peters suspects:
Just four days after the General Election the true state of the dairy industry is revealed – returns for milk that the New Zealand economy is reliant on have slumped.
“Questions need to be asked by New Zealand voters on why they were not informed about this serious decline before Election Day,” says New Zealand First Leader, Rt Hon Winston Peters.
“The drop in payout is a $5 billion hit to the New Zealand economy and 2 per cent off nominal GDP.
“It appears the government and Fonterra joined forces to keep the facts hidden from voters? . . .
Fonterra makes announcements on its previous season’s final payout and any revision to the current one at this time every year.
The record final payout for last season was no surprise. Nor was the cut in this season’s forecast.
Anyone with even cursory knowledge of the global milk market was expecting it after successive drops in the GlobalDairyTrade price index and with the knowledge that the milk supply here and around the world was outstripping demand.
Lower income will impact on farmers, those who service and supply them and the wider economy but the news isn’t all bad.
The value of our dollar fell after Fonterra’s announcement which will help all exporters.
And while dairy prices are falling, demand and prices for sheep meat and beef are improving:
Rabobank New Zealand CEO Ben Russell said the softening in overall rural confidence was clearly a reflection of the impact of the bearish global dairy outlook and lower milk prices on dairy farmer sentiment.
“Falling dairy commodity prices are the overwhelming factor at play here. At the time of the survey being taken, the globalDairyTrade auction prices fell six per cent, taking them down 45 per cent from their February peak,” Mr Russell said.
“And with global dairy supplies continuing to increase from all key exporting regions, a significant price recovery is not imminent.
“That said though, farm commodity prices move in cycles and, clearly, dairy commodity prices are entering a lower part of the cycle right now. While this is always a difficult time, the important thing to remember is the medium to long-term picture for the dairy industry is strong.”
Mr Russell said dairy farmers were also cautious with the dairy industry approaching a critical time in the year, with the peak production and selling period for New Zealand milk just weeks away.
The dampened confidence among dairy farmers was reflected in their business performance expectations in the coming 12 months.
Dairy farmers had the most pessimistic outlook of their own farm business performance. However, Mr Russell said, it should be noted this was coming off record highs for business performance expectations among dairy producers over the past 12 months.
The latest survey found almost half of dairy farmers surveyed (47 per cent) expect the performance of their own farm business to worsen in the coming 12 months, up from 30 per cent with that expectation in the previous quarter. Just 20 per cent expect an improvement in performance, compared with 27 per cent previously. A total of 32 per cent expected performance to remain stable.
While there was also a tempering in sentiment among beef and sheep farmers, after reaching three-year record highs in the previous survey, confidence in this sector remained at overall strong levels.
Mr Russell said lamb prices were up on the previous season and beef prices were currently hitting record highs due to tight global supply.
In terms of expectations of their own businesses, the number of beef and sheep farmers expecting improved performance declined from 57 per cent last quarter to 48 per cent this survey. However, the percentage expecting their farm business performance to worsen remained stable, at just seven per cent. A total of 42 per cent anticipated business performance would remain at the same level.
Despite the decline in overall confidence, New Zealand farmers’ investment intentions were overall stable, the Rabobank survey showed.
Sheep and beef farmers increased their investment appetite – with 43 per cent indicating they intend to increase investment in their farm businesses over the next 12 months, up from 37 per cent previously. Only six per cent intended to decrease investment (compared with four per cent in the past quarter).
For dairy however, investment appetite had waned, with 21 per cent intending to invest less in their businesses (up from just seven per cent with that view in the previous survey) and 20 per cent expecting to increase investment (down from 27 per cent). This was the lowest level of dairy farmer investment intentions in more than five years (since August 2009).
Mr Russell said this change in sector investment dynamics may be an early indication the decline in the national sheep flock and the rate of dairy farm conversions were slowing. . .
Federated Farmers says farmers will be down but far from out:
Fonterra Cooperative Group farmer shareholders will welcome confirmation that the 2013/14 season has ended exactly as promised with a total payout of $8.50 per kilogram of milksolids (kg/MS). That good news is balanced by a sharp revision downwards in the 2014/15 forecast.
“The 2014/15 season which offered so much has turned into a breakeven one for not just Fonterra suppliers but the entire industry,” says Andrew Hoggard, Federated Farmers Dairy chairperson.
“Like Synlait’s revision this week, there is a ‘good news and bad news’ dimension in this. The good news is that we take the 2013/14 confirmed payout and the lowest revised forecast for 2014/15, we are talking an average total of $7kg/MS across the two seasons.
“A $5.30 kg/MS milkprice is also a lot higher than some commentators had expected if the forecast sticks. If being a little word with a big meaning.
“Losing 70 cents kg/MS on the milkprice is really going to hurt. Farmers will be kicking capital works into touch and will be pruning herds to rid themselves of any passengers.
“Speaking to DairyNZ, farm working expenses this season, before depreciation and interest payments, are expected to be around $4 kg/MS this season. Feed, fertiliser as well as repairs and maintenance are going to be cut back. We’ll only do what needs to be done.
“What we know from DairyNZ is that two-thirds of dairy farms have working expenses of between $3.25 and $4.75 kg/MS. Of course when you start paying back the bank manager, the average cash costs on-farm head up to $5.40 kg/MS.
“As you can tell from what the forecast currently is, the current surplus is a wafer thin 15 to 25 cents kg/MS. Expressed as retail milk, that’s about 1.25 to 2 cents a litre this season.
“It means that upwards of a quarter of our guys will be making a loss this season.
“We also believe that unlike the Global Financial Crisis, dairy farmers have been listening and have focussed on building financial freeboard. Sadly for some farmers, they’ll have to dip into that big time.
“Federated Farmers’ advice is to watch costs but to keep your bank, farm consultant, accountant and family fully in the loop. Take a no surprises approach to get through.
“This season has been a perfect one for global milk with ideal conditions everywhere compounded by civil unrest in the Middle East and dislocation of European milk due to what is happening in Eastern Ukraine.
“We can only hope there is no more bad news but I am optimistic we may be back above $6 kg/MS for 2015/16,” Mr Hoggard concluded.
Agricultural prices are always cyclical.
Dairy farmers creamed it last season, now it’s sheep and beef farmers who have a brighter outlook. Both know that what goes up comes down and what comes down goes up again, sooner or later.
Labour could hardly contain its glee at the drop in the prices in yesterday’s GlobalDairyTrade auction:
“Another massive drop in milk prices overnight shows New Zealand needs an Economic Upgrade to limit its overreliance on the dairy industry, Labour Leader David Cunliffe says.
“Since February, milk prices have collapsed by 41 per cent, which suggests the short-lived economic recovery may have already ended. . .
“New Zealand is too reliant on one industry – riding the wave of commodity prices is not a long-term solution to grow jobs and incomes. . .
But while crying crocodile tears over the milk price it was announcing a tax that will hit dairy farmers:
. . . “We believe that the use of water for irrigation is a privilege, not an inalienable right. A resource rental is the best tool for making sure fresh water is used efficiently. However we will support proposals for water storage and irrigation schemes provided they have a broad consensus from their communities.
“Labour will use resource rentals to pay for irrigation schemes rather than paying for them out of tax and asset sales. . .
Individuals and communities already have a say in any water storage and irrigation schemes through the resource consent process.
The initial stages of any irrigation scheme are the most expensive for irrigation companies and water users.
Resource rental is just another name for another tax which will add costs without benefits, make irrigation schemes less viable, production more expensive and lead to increases in food prices.
The Green Party was equally quick to seize on the fall in dairy prices for political purposes:
Falling dairy prices are highlighting the danger of National’s economic strategy that focuses on the export of a few, simple commodities, the Green Party said today. . .
“National’s economic strategy has simplified our economy and concentrated our exports on a few, low-value-added commodities,” said Green Party Co-leader Dr Russel Norman.
“National has bet the farm on the farm and it isn’t working. A growing reliance on one or two commodity exports has made our economy more vulnerable to commodity price swings. . .
Both parties either don’t understand or are ignoring the fact that the increase in dairying had nothing to do with government policy.
Farmers made individual decisions on converting farms in response to market signals.
They did so in the knowledge that in the market prices go up and they go down.
They went up last season because demand was high.
They are going down now because supply has increased.
Both parties are also conveniently ignoring the statistics.
Dairy is important but it accounted for only 21% of our exports in 2012 and has gone up only a little since then.
The risk for dairy isn’t current government policies but those a Labour/Green government would impose including a carbon tax:
. . . Agriculture – which is currently exempt from the ETS – would pay a reduced rate of $12.50 per tonne. This works out as an 12.5 per cent hit on farmers’ income. This includes 2 per cent on the working expenses of the average farm. A Berl Economics report, released with the policy, said dairying will be ”adversely affected.”
But it adds: ”However, at the currently projected pay-out for milk solids, even dairy farms in the lowest decile would remain well above break even in the face of an emissions levy.” . .
That payout projection is much lower now.
When he announced the policy, Norman said dairy farmers could afford it.
It wouldn’t be wise to hold your breath while waiting for him to axe that tax because they can’t afford it now.
Labour and the Greens are simply anti-dairy.
They are vociferous about the costs, ignore the benefits and take no notice of the efforts farmers are making to protect and enhance water and soils.
Changes likely in lakes camping – David Bruce:
Thousands of campers who pour in to Waitaki lakes camp sites during summer face some major changes in management by the Waitaki District Council.
Most of the camps could be handed over to private operators under leases or contracts, but before any final decisions are made, people will be asked what they want.
That is likely to be contentious. Similar proposals in the past have caused consternation among some campers.
But they could also look at the Mackenzie District Council’s Haldon Arm Camp, which is administered by the Haldon Arm Reserve Trust Board, made up of campers. . .
Water deal celebrated – Sally Brooker:
Compromise and co-operation are being hailed as the main ingredients in a South Canterbury agreement on nitrogen limits.
Farmers in the Lower Waitaki-South Coastal Canterbury catchment had asked their Environment Canterbury zone committee for more time to work on allocating nitrogen emissions, within the maximum already set to meet the goals of a healthy environment and vibrant economy.
Since February, the farmers have held more than 10 meetings, with ECan supplying technical advisers. After fearing they would not agree, they eventually did.” . . .
Consumer demand in East and South East Asia for high value foods and beverages is driving export growth and diversification, a new Government report shows.
‘What does Asia Want for Dinner? Emerging Market Opportunities for New Zealand food & beverages in East & South East Asia’ was released today by Economic Development Minister Steven Joyce and Primary Industries Minister Nathan Guy.
The report finds that New Zealand’s overall food and beverage export performance to Asia is excellent; performing strongly in dairy, as well as in meat, seafood, produce and processed foods.
“Asia is the fastest growing food market in the world and is increasingly important for New Zealand exports”, Mr Joyce says. . .
New Zealand’s Māori agribusiness programmes are on show this week, as delegates from Asia-Pacific Economic Cooperation (APEC) economies visit New Zealand to address common barriers to rural economic development. Through case studies and on-farm visits, the Ministry for Primary Industries (MPI) will share experiences learned while helping to build the capability of New Zealand’s rural economic development.
The visiting delegates from Peru, Indonesia, Japan, China, Chinese Taipei, Thailand, Vietnam and the Philippines will attend a two-day APEC PPFS Rural Development workshop from 22-24 July 2014, hosted by MPI and the Northland Māori agribusiness partners.
“Food security is a common APEC challenge with increasing demands and a need to focus on sustainable productivity,” says MPI’s Deputy Director-General Ben Dalton. . .
People should not be in any hurry to write off dairy farming just because prices have taken a dive, MyFarm executive director Andrew Watters says.
The average whole milk powder price in the Fonterra GlobalDairyTrade auctions has fallen by 38 percent since February.
Dairy farmers and economists say with the recent sharp drop in prices, it is inevitable Fonterra’s $7 per kilogram of milksolids price forecast will come down – one predicted as low as $6.
But Mr Watters said predictions of the end of the good times in the dairy industry were premature.
He pointed out that Fonterra only sold only about a third of its product at the auction, and that volumes at recent auctions had been low.
The positive, longer-term outlook for dairy farming had not changed, he said. . .
Grow Movie – A Great Documentary Which Outlines Young Urbanites Turning To Farming – Milking on the Moove:
I watched the Grow Movie the other night.
It’s a documentary that tells the story of how young urban people are being attracted to farming.
The movie follows a few young farmers in the US state of Georgia. We learn how they found themselves farming & why they love it.
Most of the people were highly educated with degrees in finance, engineering & soil science etc, but they have chosen the small scale rural lifestyle. . .
Two young biosecurity sniffers were introduced to the world today, along with a new type of detector dog and a new home for the Ministry for Primary Industries’ (MPI) Auckland-based canine team.
Beagle puppies Darcie (girl) and Darwin (boy), collectively known as D-litter, were born by caesarean in May to working detector dog Zuma under the MPI detector dog breeding programme.
Steve Gilbert, MPI Director Border Clearance Services says the MPI breeding programme “provides a cost-effective way of producing fit-for-purpose biosecurity detector dogs”.
The programme has produced 27 litters since 1996 and nearly 80 percent of the individual puppies have become successful biosecurity detector dogs. . .
New Zealand premium wine sales soar in the UK market
New Zealand wine has become the number 2 country of origin in the UK market for wine sold over £7 according to the latest Nielsen data (MAT 21-6-14). New Zealand now sells 18% of all wines sold in this premium price segment, having overtaken Australia and now sits behind France.
The latest statistics also show New Zealand’s average price per bottle has increased to £7.34 from £6.79 – an 8.1% increase (Nielsen MAT 21-6-14). . . . .
New Zealand Kiwifruit Growers Incorporated (NZKGI) has welcomed the Government’s plans to get more Kiwis into seasonal work, and its decision to increase the annual Recognised Seasonal Employer (RSE) cap to a total of 9000 workers.
NZKGI President, Neil Trebilco, says this boost to seasonal workers is essential in delivering the industry’s forecasted future growth.
“The kiwifruit industry is recovering quickly from Psa and is poised for big future growth. Over the next few years we are going to see a significant increase in Gold3 volume. . . .
The GlobalDairyTrade price index dropped 4.9% in this morning’s auction.