Sunday, August 14, 2022

Challenging season lies ahead

Fonterra’s new season forecast will be out by now and whatever the figure and the range is, thankfully there should be enough daylight between it and the figure needed for farmers to break even.

Unless people have been living on the Moon, they’ll be well aware of the massive increase in costs that have occurred over the past several months.

Fuel and fertiliser costs led the way on this, with one analyst saying it had pushed farmers operating expenses by 13% for this season.

Unfortunately, it’s likely going to get worse before it gets better because of the ongoing disruptions caused by covid and the war in Ukraine.

Supplementary feed, particularly maize is going to cost around $5273 a hectare from sprayout to covering in the stack, according to Corzon Maize.

If grown on-farm using a full fertiliser programme, it will cost 25ckg/dry matter and using effluent instead of chemical fertiliser, it would cost 22ckg/DM based on a 20 tonne a hectare yield.

The cost to buy silage ranged from 40-48 cents, depending on the distance travelled. For maize grain, that cost could be around $370/t, including storage, drying and kibbling.

It doesn’t look much better for other feeds. The current spot price for palm kernel is around $504/t and soya bean hull is $950/t.

For summer crops like chicory it costs around $1500/ha to establish 12t of dry matter a hectare and $2000/ha for turnips at 12.5t DM/ha.

What is really scary are the costs of grains. Milling wheat contracts for the new season will be sitting around $600-$630 a tonne – up $200 from last season.

My advice is if you like baking, start hoarding flour now, because prices are going to skyrocket in late 2022-2023.

Imported grain from Australia won’t fare any better cost-wise as countries compete for its supply as the impact of the lack of grain coming out of Russia and Ukraine start to impact.

Drilling that all down to a real-life example, the cost to create a cheese scone alone has jumped 45% over the past two years, largely due to cost rises in flour, according to NZX.

That’s just for cropping. From all accounts, fertiliser and fuel costs are likely to remain high for the new season.

Nothing appears to have changed too much in terms of low global milk supply.

Westpac senior agri-economist Nathan Penny said at a field day at Owl Farm in Cambridge in May that these cost increases and inflation will not go away.

The dairy sector’s incomes are very strong and farmers still had buying power that other parts of the economy did not have.

“I expect the pressure on costs for farmers to be really rough over the next season at least,” he says.

It’s not all doom and gloom. Thankfully the market is still reasonably robust with most analysts predicting the slowdown in demand in China is temporary rather than permanent.

He pointed out that the current commodity price cycle is different to the one that occurred in 2014.

It is longer and prices are going to stay higher for longer because there is not the global milk volumes to fill the supply gaps.

Like NZ, European dairy producers had their own production issues and their margins are nowhere near where they should be for them to crank up production.

“There isn’t a big supply response coming this year like there was back in 2015. This is going to be a longer cycle and therefore expecting consecutive high milk prices.

He predicted another $9/kg MS milk price for next year. That has not changed following the latest dip in the GDT, with the bank sticking with its $9.25/kg MS milk price for the new season.

“We still expect this dip in Chinese demand will prove temporary as covid restrictions will eventually ease. Indeed, in Shanghai, covid restrictions are starting to wind back and daily case numbers are falling,” he says.

Likewise, ASB’s Rural Economic Note said it was still bullish on the price outlook. Global supply remains very tight and demand is fairly robust.

“Recent economic data out of China have been soft and global growth forecasts have been revised down, but both China and the global economy more broadly are still in expansionary territory, and global dairy demand is still set to rise,” ASB says.

Global dairy supply is still very tight, with no obvious signs of meeting that demand.

“Our base case is still that prices will recover some ground over the New Zealand winter. Beyond that, a lower Kiwi is giving a big lift to our forecast,” it said.

It retained its $9.20/kg MS forecast, noting that a sharp increase in supply did not look imminent.

Wherever the number lands, it’s going to be a challenging season ahead.

This article first appeared in the June 2022 issue of Dairy Farmer.

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