Prices for dairy producers in the world’s largest milk exporter will barely recover from this season’s decade lows, as a weak demand outlook weighs on the New Zealand dairy industry.
Fonterra, the Auckland-based multi-national co-operative owned by around 10,500 New Zealand farmers, announced this morning a milk price forecast for the upcoming 2016-17 season of NZ$4.25 per kilogramme of milk solids.
Although the price represents a 35 cent per kilogramme (9%) increase on the current 2015-16 season’s forecast, the price was comfortably lower than most analysts and producers had expected.
“Fonterra’s forecast though is far more conservative than most analysts’ were expecting,” noted Tobin Gorey at Commonwealth Bank of Australia.
The weak price outlook comes as US government officials trim their ideas of dairy demand from the crucial Chinese powdered milk market.
Headwinds
Fonterra Chairman, John Wilson said Fonterra’s lower price forecast “took into account factors including the high New Zealand dollar exchange rate, supply volumes from other major dairy regions, global inventory levels and the economic outlook of major dairy importers”.
All of which conspired to give a lower end price for domestic milk producers.
New Zealand is the world’s largest exporter of dairy products, with Fonterra exporting roughly 30%, or 20bn litres, of the overall 65bn litres of global dairy products traded using a milk equivalent basis.
The industry comprises a quarter of all New Zealand merchandise exports according to Fonterra and directly employs 4.9m cows and 41,000 humans each year.
As a sign of its importance to the domestic economy, the Kiwi dollar dropped 1% from 67.60 US cents to 67.00 US cents as Fonterra Chief-executive, Theo Spierings, broke the news of lower milk price forecasts.
‘Challenging conditions’
The current 2015-16 season payout of NZ$3.90 per kilogramme of milk solids was the lowest price received by farmers since the 2006-07, where growers received NZ$3.87 per kilogramme .
The current dairy industry is still an unbalanced market where supply continues to outstrip demand causing prices to track lower.
Mr Wilson, notes that “conditions on-farm are very challenging”.
However, NZ dairy farmers currently receive no public subsidies, and are therefore exposed to the oscillating global market forces that determine local farmgate milk prices.
Their profitability, unsurprisingly, has great variability year on year.
Silver lining in China?
Going forward, Mr Spierings still sees strong demand from the valuable Chinese market noting that “long-term fundamentals remain positive with demand expected to rise by 2-3% per year”.
As the world’s largest dairy importer, China’s dairy demand is key to Fonterra’s profitability.
Its retreat from the dairy market was largely viewed as the catalyst for the current low-price cycle weighing on the dairy sector.
But the US Department of Agriculture’s Beijing bureau painted a grimmer picture for Chinese demand, at least in the short term.
2016 whole milk powder imports were forecast at just 300,000 tonnes, the lowest level since 2006, and less than half the levels seen during the boom years of 2013 and 2014.
The bureau forecast Chinese domestic whole milk powder production to rise, meaning that stocks are contracting more slowly than thought, the bureau said, while the size of the 2016 carry-in was also seen much larger than previously forecast.
The bureau sees 2016 whole milk powder ending stocks at 177,000 tonnes, compared to the official USDA forecast of 87,000 tonnes.
Source: Agrimoney
