This article first appeared in our sister publication, Dairy Farmer.
Farmers will be well through calving now and, with spring just a month away, will be welcoming what is hopefully a spell of warm, settled weather to make the most of peak milking.
It has been a torrid winter for many around the country as heavy rain made many paddocks uninhabitable for cows.
This has limited the options for farmers as they walk a tightrope between providing enough feed to keep their herd well conditioned and protecting their grass in anticipation of what they hope will be a good spring.
Inside the farmgate it will mean milk in the vat and a chance to get summer feed crops in the ground if the predicted El Niño comes to fruition.
For the dairy market, it is increasingly looking like it could be a financially tight season, assuming the forecast stays about where it is around $8/kg milksolids.
While some costs are starting to come down, most notably fertiliser, inflation and interest rates are still high.
BakerAg’s just-released Dairy Systems Monitoring report warns that the industry is about to navigate a period of low commodity prices, and farmers should prepare accordingly.
The report, based on financial data of 50 dairy farms across New Zealand, says the amount of discretionary cash available for these farms is expected to fall from $2.50/kg MS to $0.50/kg MS.
That doesn’t leave a lot of wriggle room. Looking back at last season, it says that feed and grazing costs made up the largest increase in expenditure among the farms, up 14% on a per-kilogram-of-milk-solids basis.
“This is not surprising, with purchased feed and cropping costs shifting substantially, in some cases by over 20%. Many farmers have higher spending but do have higher feed inventory, which is accounted for as an adjustment to the EBIT.
“Emphasis is needed in 2023-2024 to ensure any feed cost is justified. Leaner systems are needed with a lower milk price.”
The report recommends that those with costs above $6/kg MS keep pruning.
For the dairy market, the peak milk period should test the global fundamentals that are occurring.
Following the July 18 GDT, Westpac blamed an unexpectedly sluggish Chinese economy for the 1% fall and was revising its forecasts for Chinese economic growth this year.
“As recently as last month, we expected economic growth for 2023 of 6.2%. Since then, we have cut the forecast to 5.7%, and this week’s June quarter GDP data indicate further downside risks to that number.
“Factoring in these downgrades and the ongoing dairy price weakness signals clear downside risks to our 2023/24 milk price forecast of $8.90/kg. As a result, our forecast is under review.”
NZX analyst Alex Winning said the result was no surprise.
“It’s likely prices will continue to slowly soften like this going forward, as there just isn’t much in the market to support any increases.”
ASB, in its Commodities Weekly publication, is trying its hardest not to say “I told you so”.
“As much as six months ago, we highlighted those supply and demand dynamics as headwinds for the 2023-2024 season and our sense is that not much has shifted.
“A rapid recovery in Chinese demand looks unlikely, with the latest economic data continuing to underperform weaker-than-expected GDP growth and stubborn unemployment.”
It does not expect a contraction in milk supply with the potential for drought in Europe and the possibility of an El Niño in New Zealand.
“Perhaps most importantly, domestic Chinese output and inventories for both WMP and SMP have been unusually high. All up, we retain our $7.25/kg MS farmgate milk price forecast for the next season.”
However, Fonterra chief executive Miles Hurrell was more positive.
Speaking as part of a panel at the China Business Summit in Auckland, he said he was not concerned about the economic outlook – “I’m quite bullish on that in the medium term.”
When the panelists were asked what they saw in China, Hurrell pointed to the rate of change in the country, saying keeping up with that is important.
“It is how we keep up with the changing dynamics and the changing demands of customers or consumers.”
It is expensive to put capital into markets, launch brands and new categories, he said.
“To see your customers move so quickly, it’s hard to keep ahead of, so we’re going to be thinking about that.”
While there are certainly some economic headwinds approaching, farmers first and foremost will be hoping for a bout of warm, sunny early spring weather. Not only would it be good for their cows, but it should also help with on-farm mental health after such a wet challenging winter.