Farmgate milk price: Debt still key with NZ milk price falls

ASB rural economist Nathan Penny revised his final farmgate milk forecast down $NZ0.25 a kilogram of milk solids to $NZ6.50kg/MS last week. This revision followed four consecutive Global Dairy Trade auction price declines, including the latest average drop of 3.4 per cent to $US2970/tonne.

Fonterra, NZ’s largest dairy processor, is set to review its forecast next month. Mr Penny said it was likely to trim, but how much of a trim was the unknown.

He said the NZ production outlook was better than it had been in the past — forecasting 3 per cent growth — but warned that despite the wet spring the drought risk remained imminent.

For example the Waikato region, a large NZ dairy pocket, does not have much irrigation. As a predominantly pasture-based dairy system, recent hot weather will ensure this area is monitored for the next few months for changes in conditions and how it could impact milk production.

According to ASB, production across all NZ processors was up 2.9 per cent last month compared to the same month last year. This means the season’s production is tracking 1.1 per cent up on last year.

Mr Penny said a weak NZ dollar against the US dollar in the past couple of months had offset some of the falls in dairy commodity prices.

Describing dairy farmer confidence as “fragile” following years of low farmgate milk prices, Mr Penny also pointed to anticipated environmental pressures on farmers as well, saying the past few years of rapid industry growth would not be repeated any time soon.

“I think long term the NZ industry is going to consolidate,” he said. “(Low price years) left some deep scars, with environmental costs kicking in and a new government that is less (about) agriculture and probably more on the environment side of things.

“It is looking to be carbon zero by 2050 and the ag sector will be included in its emission trading scheme. Farmers having to offset their emissions is something that will cost them money a few years down the line.”

He said long-term plans such as buying the neighbour’s farm, or converting farms to dairy were issues “around the edges” for dairy farmers. Instead they were focusing on debt repayment and the balance sheet as other agricultural industries were taking off.

Mr Penny explained that in areas where farms had the ability to switch between horticulture and dairy, farmers were opting to choose horticulture — particularly Kiwi fruit.

Last week’s Global Dairy Trade auction, its 200th trading event, dropped by 3.4 per cent to an average of $US2970 a tonne. Whole milk powder prices came back 2.7 per cent to $US2778/tonne and skim milk powder prices were down 6.5 per cent to $US1701/tonne. Cheddar prices were down 4.2 per cent to $US3831/tonne.

Rabobank senior dairy analyst Michael Harvey said if there was a revision in the Fonterra New Zealand farmgate milk price, it wouldn’t mean anything at the moment for Australian dairy farmers.

He said the NZ market more reflected WMP prices which had “taken a bit of a dive” but the global cheese market — Australia’s dominant export — has held up well.

He said the recent falls in the GDT auction signalled that the dairy market was under pressure, with EU production “picking up speed”, but said if that resulted in downward farmgate milk price pressure it would more likely be reflected in the prices for next season.


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