Friday, December 1, 2023

Prices keep going up

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Each month the milk monitor Stephen Bell delves into the dairy industry and gives us the low-down on the good, the bad, the ugly and everything in between.
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Financially things are looking good this month.

So, apart from environment rules, compliance hassles, the threat of trees, gun laws, staff shortages, bank pressure and holes in socks farmers have nothing to worry about.

Talking of holes I reckon the loss of the art of darning is responsible for the breakdown in the fabric of society.

But enough of philosophy, let’s get back to the money.

Despite caution being expressed by industry leaders the likely farmgate milk price for this season keeps going up.

After the last Global Dairy Trade auction the NZX forecast lifted eight cents to $7.49/kg MS. It’s spot price, based on selling the season’s milk at the latest prices has gone even higher, to $8.07. Some might think that’s pie in the sky territory but given how far the forecasts have come already this season it’s not off the planet.

The optimism is backed up by the NZX’s milk price futures September 2020 contract at $7.42 and Fonterra’s  fixed milk price November offer settling at $7.38, before the co-op takes its admin cut of 10c a kilo after starting at $6.75 in June.

Fonterra chairman John Monaghan did warn farmers not to expect too much when it set its latest forecast at $6.55 to $7.55 but the indications now are that it is firmly in the top end of that range. And despite Monaghan’s wariness Fonterra based its advance payments in the middle of the range at $7.05 so you can bet your boots it’s confident the price won’t go below that, so no need to expose those holey socks.

Given recent events and its experience in Australia I’m sure Fonterra won’t want a bar of overpromising and under-delivering.

And given the global market’s history of volatiliy it’s probably wise farmers don’t get their hopes too high. 

Despite the continuing upswing in prices here it’s not all plain sailing around the world. Farmers Weekly published reports of the British milk market being on the verge of collapse and Dean Foods, admittedly a domestic market producer, in the United States seeking bankruptcy protection and putting itself up for sale.

However, there are no clouds like the European skim milk powder stockpile, on the horizon and, indeed, SMP prices have been performing well lately.

Locally, we have seen what might be called the changing of the guard.

Fonterra is shying away from value-add consumer products while Synlait, whose fortunes so far have been closely aligned to those of A2 Milk, buying Dairyworks, a company that specialises in producing consumer dairy products.

While Fonterra wants to concentrate on business-to-business transactions and on supplying ingredients for food service and specialist products such as fitness and aged care products Synlait is going in the opposite direction.

It says the Dairyworks acquisition allows it to get closer to consumers, a key part of its long-term strategy.

And those doing some long-term thinking reckon Synlait might be right. They say if laboratories can make real milk without cows then that is likely to be used more in the ingredients sector than being sold direct to consumers. That puts those making products with real milk from cows in the pound seats and could leave those making ingredients wondering how they are going to pay for their ticket.

While Dairyworks isn’t taking on the world, as Fonterra tried to do, it has significant sales in New Zealand and Australia and strategic customers in the food service, quick service restaurants and export channels. 

So, if the sale gets Overseas Investment Office approval, Synlait will have the market covered and no longer have all its eggs in one basket. It supplies nearly half of New Zealand’s cheese and a quarter of its butter. It has a 9% market share in ice cream and a 19% share in milk powder. Its brands include Dairyworks, Rolling Meadow and Alpine.

I’ll watch developments at Fonterra and Synlait with great interest in coming years. 

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