eCommerceNews New Zealand - Technology news for digital commerce decision-makers
Story image
ANZ AgriFocus forecasts farmgate milk price of $4.50-to-$4.70/kgMS with tide turned on dairy prices
Thu, 5th Feb 2015
FYI, this story is more than a year old

New Zealand's farmgate milk price may be $4.50-to-$4.70 per kilogram of milk solids for the 2014/2015 season with dairy incomes a key downside risk for the economy, Australia - New Zealand Banking Group's AgriFocus report says.

That compares with the AgriHQ seasonal farmgate milk price of $4.55/kgMS and Fonterra Cooperative Group's December forecast of $4.70/kgMS, which was down 60 cents on its earlier estimate following a halving of dairy prices during the season.

In its latest Agri Focus report, the bank's economists said this week's GlobalDairyTrade auction, which led to a larger-than-expected jump in the price of whole milk powder to US$3,042 per tonne from US$2,758 two weeks ago, suggests the tide has turned for dairy prices. The question is whether the bounce will be strong enough to ward off further cuts in the 2014/2015 outlook.

The bank still expects the recovery from here to be modest due to weaker demand and European competition.

"Dairy prices need to continue to be improve for profitability to be restored across the industry and the heavy build-up in leverage to not become problematic," the report said.

It predicts whole milk powder prices will recover to around the low US$3,000 - $3,500 per tonne by early next year. It needs to be at the upper end of that scale to deliver Fonterra's current forecast, which when financing costs are factored in, is still below the cost structure of a typical owner-operator of a farm. It's an income loss of $6.3 billion, or 2.9 percent of gross domestic product compared to last season.

Cash flow for the sector this season is not as bad as the headline numbers suggest, due to the high deferred payments from the previous season, but things will start to tighten from July to October, the report said. That will lead to a cut in capital and discretionary spending.

"That will create some issues across the economy, but looks manageable given pep in other areas."

The biggest concern for the industry and broader economy remains the outlook for the sector's cash flow over the coming 18 months.

One year of challenge is manageable, but two years would become problematic, the report said.

The bank forecasts a softer opening price in May for the 2015/2015 season of around $5.75/kgMS, and a further uplift toward the low-mid $6/kgMS as the season progresses.

Current milk powder prices are below the cost of production for all the major exporters with NZ farmgate prices having so far borne the brunt of the global downturn.

But the effects of lower dairy products prices are now being felt more widely which will help rebalance supply and China's import demand is also expected to pick up in the second half of the year, the report said.

It anticipates milk supply growth of 1.3 percent this year across NZ, Europe and the US, the three major supply regions, which account for nearly 75 percent of global cross border trade.

If milk supply slows to that level across the main exporters, it would imply a 30 to 40 percent lift in GDT auction prices by the second half of this year.

The recovery is likely to be toward the bottom end of this range though, given the bow wave of milk from 2014 and inventory levels will take some time to clear, ANZ said.