Thursday, May 19, 2022

A good end to the year

Each month the milk monitor delves into the dairy industry and gives us the low-down on the good, the bad, the ugly and everything in between.

What a difference a month makes.

Spring has officially sprung and the warm, wet weather has seen pasture covers jump across most of the country’s main dairy regions in November.

For farmers, the growth has turned into a feast for their herds as they try to maintain their pasture quality. Rural contractors are also run off their feet as they try to keep up with demand for silage to be cut and feed crops to be planted.

Milk prices are yet to lose any of its steam after two positive GDTs in a row through November. Milk powder is now just below US$4000 following the November 16 sale. The previous sale saw the overall price index jump 4.3%.

It prompted Westpac economist Nathan Penny to lift the bank’s forecast 40c to $8.90/kg milksolids. That would make it a record high, beating $8.40/kg MS in 2013-2014.

He justified the forecast lift because he expects New Zealand production to fall by 1.5% compared to last season.

“Winter and spring have been either wet or cold, or both, in many parts of the country. As a result, production for the first four months of the season is running at 3.1% behind the same stage of last season,” Penny says.

Production data from Fonterra’s Global Dairy Update for September reflect that, with milk volumes down 4.3% for September. Its season-to-date collections were 303.9 million kg MS, 3.4% behind last season.

As good as the pasture growth has been through November, it’s pretty doubtful that production will be made up before the full heat of summer hits the country.

It is a point ASB made in its Commodities Weekly publication. While production will improve, it did not expect a surge and the global backdrop will remain soft.

“In short, the global demand and supply balance is tight enough to keep prices supported,” it said.

It believed whole milk powder (WMP) prices had further momentum reflecting that buyers are paying a premium to secure dairy products well into the latter stages of the season.

“Unlike during the last dairy price cycle seven years ago, this dynamic isn’t just boosting WMP – all products are running 25- 60% ahead of long run averages, with the biggest gains for fats and cheeses,” it said.

This means Fonterra will avoid running into the same problems it did during the 2013-2014 season, where it was unable to deliver on the milk price manual output.

Fonterra has also evolved and diversified its product mix since that season and no longer has all of its eggs in such few baskets. 

Rabobank’s Emma Higgins also concurred, saying further upsides in commodity markets cannot be ruled out as the slow production season and sluggish Northern Hemisphere production had buyers on high alert in the bank’s November Agribusiness Monthly.

Milk price futures are also at $9/kg for the first time at NZX, with its September 2022 contract trading at $9.07.

ASB, however, remained cautious.

“Our core view is a little more cautious, but a record-high milk price is all but locked in for this season and there is an upside risk to our own $8.75/kg MS forecast.

“Prices have already been locked in at high levels for the majority of this season’s sales and a higher NZD won’t have much of an impact given we expect the co-op is already around 80-90% hedged around the 0.69-0.70 mark,” ASB analysts say.

While the ongoing threat and disruption of covid-19 and soaring input prices are taking a bit of the gloss off of this, farmers are in a great position to see off the year in the best possible way.

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