Milk producers may have to wait for price recovery

October 22nd, 2014


Category: Dairy

Milk-Trio450x299(Agrimoney) – Milk producers may have to wait until 2016 to see a revival in prices, US farm officials said, forecasting continued rises in output from New Zealand, the top exporting country, despite lower values.

“The good times for dairy farmers have gone away,” the US Department of Agriculture bureau in Wellington, New Zealand said, highlighting the drop in expectations for returns for the country’s producers.

Auckland-based Fonterra, the world’s biggest dairy exporter, has forecast a 37% plunge to NZ$5.30 per kilogramme of milk solids in its payments to milk producers in 2014-15, and even this figure “would be in jeopardy… if export prices remain at their current levels”, the bureau said.

Prices at GlobalDairyTrade, the benchmark dairy auction run by Fonterra, have near-halved this year, undermined by strong production in New Zealand and other major exporters, such as the European Union, at a time when Chinese importers have retreated after a stock-building programme.

Lagging production depressant

However, lower prices are “unlikely” to depress New Zealand milk production in calendar 2014, when volumes remain supported by good weather for pasture and farmers’ preparations, made when values were high, to maximise output.

Indeed, the bureau estimated New Zealand dairy output for 2014 at 21.74m tonnes, 298,000 tonnes above the USDA’s official forecast.

For 2015, while low dairy prices will curtail milk output, as farmers adopt cost-saving measures such as saving on feed and selling cull cows early for slaughter, production will still rise 1.8% to a record 22.12m tonnes, the bureau said, in its first estimate for next year.

The forecast includes an assumption of a 0.9% rise to 5.14m head in cow numbers – but with farmers’ cost-savings depressing productivity growth, through the likes of genetic and feed improvements, below its recent rate of 1.5% a year.

Payout prospects

The prospect of a slow recovery in prices tallies with historical moves, which suggest New Zealand’s farmgate milk payouts moving “in a three-year cycle between peaks”, the bureau said.

“It is quite conceivable that any recovery in [dairy] prices during 2014-15 will be minor and the 2015-16 milk solids payout won’t be significantly greater than the payout in 2014-15.”

The bureau actually pencilled in farmers receiving NZ$6.50 per kilogramme of milk solids next season, above this season’s expected level, but a little below the long-term average.

However, it raised the potential for a payout which would leave farmers “very concerned”, and leaving their expenditure “very tightly controlled”.

Powder inventories

The bureau forecast a continuing build in New Zealand’s stocks of whole milk powder, its prime export product, thanks to the rising liquid milk production and China’s retreat from imports.

Whole milk powder inventories as of the end of 2014 were forecast at a record 200,000 tonnes, up 27% year on year, rising more slowly to 220,000 tonnes by the close of next year as Chinese demand recovers.

For 2014, “trade sources indicate that there are considerable unsold stocks in China which is reducing Chinese demand for imports considerably.

“This is allowing the second-tier purchasers back into the market at significantly reduced prices, but it is thought that the increased purchasing by these countries won’t be enough to counterbalance the Chinese reductions.”

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