Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search

 


Dairy farming outlook good

23 July 2014

Dairy farming outlook good

The outlook for New Zealand dairy farming for this season and beyond is very good, says New Zealand’s largest farm investment company, MyFarm.

MyFarm Executive Director, Andrew Watters says recent predictions of the end of the good times in the dairy industry are failing to take into account the long-term fundamentals.

“The fundamentals drivers of good farm returns have not changed in the past few weeks. The fluctuation in milk prices between last season and this is just another example of the volatility that New Zealand dairy farmers have to manage,” Mr Watter says.

“Well run dairy farms with moderate debt and clear business plans can still generate good levels of operating profit at payouts $6.50/kg milk solids and above.”

Since February 18 the average whole milk powder (WMP) price has fallen by 38%, after reaching record highs. However, Mr Watters says it is important to remember that Fonterra only sells up to 35% of its product on GDT and volumes at recent auctions have been very low. For example, volumes sold at last week’s auction represented only just over 1% of New Zealand’s annual milk production.

Recent reports from Goldman Sachs and the United States Department of Agriculture (USDA), back Mr Watter’s positive outlook for the long term and the new dairy season, which officially starts next week (August 1).

Below is a summary of the relevant points from the USDA’s Dairy World Markets and Trade Report (http://apps.fas.usda.gov/psdonline/circulars/Dairy.pdf) and Goldman Sachs Glogal Agriculture and China Consumer Staples, 11 June 2014.

i. The underlying demand for imported Whole Milk Powder (WMP) by China is expected to be 30-50% higher this year than last year. Last year’s demand was significantly under supplied because there was not enough product.

ii. On a calendar year to date basis, China’s WMP imports for 2014 are 70% higher than last year, and the recent declines in auction prices are generally expected to reverse once this stockpile has been used up.

iii. Chinese growing demand for WMP is not expected to diminish materially for at least the next five years.New Zealand will not be able to supply all the WMP China needs, so prices will generally remain elevated as a result of this excess demand.

iv. At the current high prices it is profitable for the EU and the US to start processing WMP for export. But this will require them to switch from their current export focus, Skim Milk Powder and cheese. It will take time for the EU and the US to develop the capacity to make more WMP.Meanwhile cheese prices are starting to improve, and the USDA expects most of the extra milk that the US and EU produce this year will go into cheese.

v. Because NZ simply can’t supply all the WMP China requires, milk powder from the US and EU will have to fill this gap. The EU and US will only produce WMP if it is above their costs of milk production, which are on average significantly higher than NZ’s (currently NZ $6.75-$7.33/kg milk solids depending on the exchange rate used). This means WMP prices will have to be high enough to meet this on-farm costs and this in turn will underpin NZ farm gate prices at this level this year and out into the future.

vi. Chinese milk production costs have risen significantly in the past three years due to high costs of imported feed and increased costs for land and labour.According to the FAO/OECD June 2014 report Chinese milk prices are now 30% above the world average making WMP imports very attractive.Food safety scares with local product (today another scare with meat products) will result in continued demand for NZ product.

vii. Even if the WMP prices drop by around 12% this year as Goldman Sachs are predicting (from a record USD 4,700/t to a next best record of USD 4,150/t), this season’s milk price would drop to $6.50/kg milk solids at the current US exchange rate.If the NZD/USD exchange rate drops to the 80 cent level it was this time last year, the payout will only drop to $7.20/kg milk solids.Most New Zealand dairy farm are still very profitable at a milk price of $6.50-$7.20/kg milk solids, especially when on-going productivity increases are factored in.

viii. Mr Watters says: “The reality is that Chinese milk production is not keeping pace with demand and that isn’t expected to change despite local milk supply growth. It will also take time for EU and US competitors to increase their whole milk powder production and they will need to produce this at a competitive price to New Zealand.

ix. “In the medium to long term, provided we continue to focus on productivity, we are in the box seat and there’s little reason to be despondent.”

About MyFarm
MyFarm Limited has been putting together and managing New Zealand farm investments since 1990, offering investors exposure to an asset class that is now theengine room of the NZ economy. MyFarm currently has 47 dairy farms and 6 sheep and beef farms under management across NZ with assets valued at a total of $550million.

For more information contact:
0800 MYFARM (693 276)
myfarm.co.nz

ENDS

© Scoop Media

 
 
 
 
 
Business Headlines | Sci-Tech Headlines

 

Scoop Business: NZ Dollar Catches Breath After "Goldilocks" Slump

The New Zealand dollar edged up following its dramatic slump yesterday after the Reserve Bank confirmed speculation it intervened in the currency market last month and PM John Key suggested a “Goldilocks” level far lower than at present. More>>

ALSO:

Biosecurity: Kiwifruit Claim To Hold Officials Accountable For Psa

Kiwifruit growers have joined forces to hold Biosecurity NZ accountable in the courts for its negligence in allowing 2010’s Psa outbreak that devastated New Zealand’s kiwifruit industry and exports. Foundation claimants representing well ... More>>

ALSO:

Poison: Anglers Advised Not To Eat Trout In 1080 Areas

With the fishing season opening in just a few days (1 October 2014), anglers are being warned by the Department of Conservation(DOC) not to eat trout from pristine backcountry waters and their downstream catchments, where the department is conducting 1080 poisoning operations. More>>.

ALSO:

Quotas: MPI Swoop On Suspected Fraudulent Fishing Activity

Ministry for Primary Industries (MPI) compliance officers swooped on a Hawkes Bay fishing enterprise today to secure evidence in an investigation into suspected fraudulent activity... “The investigation involves activity throughout the commercial supply chain – catching, landing, processing and exporting.” More>>

ALSO:

Scoop Business: Fonterra Slashes 2015 Milk Payout, Earnings Tumble 76%

Fonterra Cooperative Group cut its forecast 2015 milk price payout by about 12 percent, citing weaker global dairy prices and said there is a risk of further declines given strong global milk production. More>>

ALSO:

Scoop Business: RBNZ Keeps OCR At 3.5%, Signals Slower Pace Of Future Hikes

Reserve Bank governor Graeme Wheeler kept the official cash rate at 3.5 percent and signalled he won’t be as aggressive with future rate hikes as previously thought as inflation remains tamer than expected. The kiwi dollar fell to a seven-month low. More>>

ALSO:

Weather: Dry Spells Take Hold In South Island

Many areas in the South Island are tracking towards record dry spells as relatively warm, dry weather that began in mid-August continues... for some South Island places, the current period of fine weather is quite rare. More>>

ALSO:

Get More From Scoop

 
 
Computer Power Plus

Standards New Zealand

Standards New Zealand

Mosh Social Media
 
 
 
 
 
 
 
 
Business
Search Scoop  
 
 
Powered by Vodafone
NZ independent news