The 2021-22 season will go down in the history books as a tough season; a cold wet spring across the country followed by an unpredictable, tough, dry summer.
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Quite frankly the worst anyone could ask for when pasture farming. Added to all of the already listed issues, Canterbury, which would normally receive very little rain, but lots of dry weather, had a wetter than normal summer, which impacted cereal crops, in both yield and ability to harvest on time and consistently.

Milk production in New Zealand for April 2022 has printed 5.21% below the same month a year prior. This is the ninth consecutive month of milk production declines and pushes season-to-date milk production to 3.88% behind last year on a kilograms of milksolids (kg MS) basis. Season to date, on a tonnage basis, output is 4.13% behind the season prior. Year to date, milk production is 5.04% behind the same period last year.

Tough weather is to blame for this reduction in milk production, April was a tough month, with some farmers in the worst affected regions forced to end the lactations of their herds due to a lack of feed. Pasture covers in the Waikato at the end of April were in terrible states, and at the time of writing, are looking better, but are still a long way from being even adequate for farmers to traverse winter with. Southland farmers have dealt with a summer drought for the start of the year, however, this factor has changed in the last six weeks, with pasture growth rates responding well to warm rain in mid-April, with rain managing to support decent growths in the time between. Feed levels in Southland are returning to acceptable levels, but are overall still poor. Of note is the amount of supplement feed fed during the last four months to get through the dry weather; this factor is expected to create issues in the upcoming spring.

The current NZX forecast for the full 2021-22 season’s production is a 4.3% decline, compared to the previous season, with a range of -4.9% to -3.7%. When looking at the NZX PGI graphs and noticing the large retraction in pasture production in the Waikato over the last month, it is clear to see that milk production is under pressure. Our expectations are that the coming season will start off under poor pasture conditions, with milk production through winter expected to be impacted. Early spring conditions will also impact peak milk production for the coming season.

What happened last week in dairy?

Milk price forecast 

Fonterra has opened the 2022-23 season with a milk price range of $8.25-$9.75/ kg MS, with the midpoint sitting at $9.00/kg MS. Chief executive Miles Hurrell noted that the wide range is a result of the volume of uncertainty and market issues the co-operative is facing in its markets. This is the highest opening farm gate milk price in Fonterra’s history.

Fonterra didn’t adjust their forecast for the 2021-22 farm gate milk price, which is still pegged at $9.10-$9.50/kg MS, with the midpoint still sitting at $9.30/kg MS. This forecast milk price will be the highest farm gate milk price ever paid by the co-op, eclipsing the previous high of $8.40/kgMS in 2014.

The NZX farm gate milk price for the 2021-22 season sits at $9.22/kg MS, with a range of $9.21-$9.25/kg MS, which is notably under Fonterra’s forecast midpoint.

For the 2022-23 season, the NZX FGMP forecast currently sits at $9.88/kg MS, with a range of $9.62-$10.49/kg MS. This forecast is significantly higher than Fonterra’s opening forecast.

Our forecast is leaning on the forward curves of the Dairy Derivatives market, with expectations that commodity prices will keep appreciating through the season. This forecast is also calculated under an average exchange rate hedge of 0.6880 USD:NZD for the season; this is one aspect that will be highly variable over the coming season.

Fonterra also notes this factor in their market announcement today, FX rates adjusting rapidly currently are creating further uncertainty. This comes as most economies are dealing with volatile situations, with central banks globally trying to fend off inflation and other fiscal issues. This uncertainty will create a lot of unknowns for the coming season’s forecasts.

While Fonterra’s $9/kg MS opening price for the 2022-23 dairy season is the highest opening price the co-op has ever recorded, with current high inflation, $9 only comes out at $6.25/kg MS when adjusted.

Chinese lockdowns knock milk market

As China’s lockdowns have continued through March and April, it’s no surprise that milk supply has pivoted further towards domestic supply. Milk production has ramped up and imports have decreased significantly as consumption plummets with restaurant and supermarket closures and ports being limited or shut down completely. The milk price has followed milk production increases with a downward trend.

China’s raw dairy production in the first quarter was up 8.3% with this season’s record dairy price driving the increases. Development of large scale farms across various regions has also increased capacity for production. In March, however, dairy production decreased 2% year-on-year (YoY) as a result of the lockdowns, compared to a record March in 2021.

As expected, China’s total dairy import volumes declined a massive 21% in April YoY and 14% Year-to-date (YTD) in April. NZ origin imports declined across all commodities except butter, in line with total commodity declines. Dairy exported out of Germany, the US, and Australia all experienced big declines with liquid milk and cream out of Germany into China showing the biggest drop.

All major commodities except butter saw declines YoY. WMP, SMP, AMF, cheese, whey, and liquid milk and cream experienced significant declines, down 9%, 32%, 57%, 29%, 30%, and 25% respectively YoY.

Despite the significant drops, total dairy import values have increased 2.2% YoY in April.

While China has indicated the easing of restrictions, Shanghai’s continued closures of supermarkets and restaurants is cause for concern for exporters into the market. Despite the increased production however, Chinese domestic food production is unable to keep up with consumption in the long run, and we anticipate the need for dairy imports to ramp up. As the milk price continues to trend lower, production is likely to follow suit with global farming costs rising.

The South Island dairy company Synlait Milk is back in the black as its ingredients division saw higher than normal sales, while its major customer rebalanced inventory levels.

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