Thursday, April 25, 2024

Slide in global milk price makes for anxious times

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Prices have fallen at the three global auctions since the start of the season, with the GDT index hitting a three-year low in mid-July.
Reserve Bank of New Zealand data shows dairy debt was $36.8 billion as at May 2023, and around half of that was interest only.
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The ongoing slide in global milk prices is already putting pressure on this season’s payout forecast, which will only rack up pain for farmers.

Those farmers, who will be expecting their herds to come home from winter grazing shortly in preparation for calving, are facing the prospect of a milk payout well below their cost of production for the new season.

Prices have fallen at the three global auctions since the start of the season, with the Global Dairy Trade index hitting a three-year low last week, and there’s not much respite on the horizon.

The index now sits at 959, down from 1002 at the start of the season. It’s a significant fall from 1593 when prices peaked early last year.

Meanwhile, all New Zealanders – farmers included – are facing annual inflation of 6%. Then there are the on-farm costs.

Given that, farm consultancy firm BakerAg expects this season to be “lean”.

That’s according to a new report authored by the firm’s director, Chris Lewis, who said it is “framing up” to be a challenging year.

But he noted that at this point in the season, things are prone to change.

“Just like what we saw 12 months ago, we were expecting a very strong season, and that reversed on us. Financially, it tightened up a lot and climatically, it tightened up a whole lot.”

Mild autumn and winter conditions mean the season hasn’t gotten off to a bad start, Lewis said. 

Cows are in good condition, and there is plenty of supplementary feed on hand.

“Those things will help us physically start the season well, but financially, farmers very much have to keep at the forefront of their mind that they’ll have to be lean in their spending and decisions.

“I think we’ll see a plateauing of costs but a drop in inputs.”

A “classic example” is fertiliser, with farmers purchasing less as the price per tonne increased.

“The actual spend was kept under control by farmers not putting as much on.”

Lewis expects that will be common over the dairy season with farmers looking to make whatever they can last longer.

The timing of culling cows will be interesting, with farmers likely going to be careful taking excess numbers through.

It’s also the first season with no live export option for farmers to offload heifers.

That could mean farmers choose to rear fewer calves in anticipation that there’ll be a surplus of quality replacement animals on the market to purchase, Lewis said.

According to DairyNZ’s economic tracker, a farmer with 536 cows will end up with a cash deficit of $102,087 in the current season, and that’s with a farmgate milk price of $8.16 per kilogram of milk solids (kgMS).

The economic tracker is designed to help support farmer decision-making with data.

Expenses for things like fertiliser and feed are coming off but only compared to last season.

Fertiliser costs are 30% higher than they were in the 2020-21 season, and feed costs are 40% higher.

In that season, farmers had a cash surplus of $54,000 and the farmgate milk price was $7.45 per kgMS.

One key factor that is eating into returns is rising interest rates. With an estimated 80% of farm debt on a floating rate, farmers are now facing interest rates in the high 8%.

The DairyNZ economic tracker shows that the 536-cow farm will pay $358,441 in interest this season, up from $175,817 in 2020-21.

Reserve Bank of New Zealand data shows dairy debt was $36.8 billion as at May 2023, and around half of that was interest only.

If roughly $18bn of debt is on a floating rate of 8%, that’s $1.44bn in interest payments.

Fonterra’s latest forecast is for $7.25 to $8.75 per kgMS, with a midpoint of $8.00.

At the time, chief executive Miles Hurrell said the wide range was due to uncertainty around the timing and extent of China’s economic recovery from covid-19.

In fact, a payout with $7 in front of it is looking more likely for the current season.

ANZ Bank has lowered its forecast to $7.75 per kgMS and milk price futures are currently priced at $7.68 kper kgMS.

“The softer demand from China is having the largest impact, as China is by far the world’s largest importer of dairy products,” said ANZ Bank.

Westpac Bank is still tipping $8.90 per kgMS but signalled downside risks and said that the forecast is under review.

They also agree the chief catalyst for the ongoing price decline is the unexpectedly sluggish Chinese demand.

However, ANZ said while the Chinese market is expected to remain relatively weak for some time, “as supplies tighten, prices are expected to improve later in the season”.

Rabobank expects supply to tighten, with Emma Higgins, senior agriculture analyst, tipping NZ’s production to lift by 0.6% in the current season.

While “ample milk for the market has been the theme of the Northern Hemisphere spring flush”, she expects weaker milk production to emerge over the remainder of the year “with pinched profitability” for both the European Union and the United States.

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