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Dry weather cutting dairy production, boosting power costs

Friday 22nd March 2019

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New Zealand milk production fell from year-earlier levels for the first time in 11 months in February due to dry weather.

The country’s dairy farmers produced 165 million tonnes of milk solids in February, about 0.1 percent less than the same month last year, according to Dairy Companies Association of New Zealand data.

The decline was the first since March last year and trims the production gain for the season that started in August to 4.9 percent.

NZX dairy analyst Robert Gibson says the reduction was due to dry conditions in January which continued into the first half of February. 

BNZ noted that processor-imposed penalties for excessive use of some supplementary feeds may also have reduced production. Spring and early summer conditions had been “superb” but they had deteriorated significantly in the past two months.

“While some recent rain will help at the margin, we don’t think it will be enough to prevent milk production falling behind a year ago,” the bank's economists said in a note on Wednesday.

Dry weather, particularly on the North Island, prompted Fonterra to trim its full-year production forecast last week, the second cut in two weeks.

Falling lake levels are also holding up power prices. Storage in Lake Taupo, which supplies Mercury NZ’s plants on the Waikato River, is at its lowest since May 2016.

Recent North Island hydro inflows, based on a four-week rolling average, are the fifth-lowest in 88 years of records, according to Energy Link. South Island inflows were the 25th lowest.

The consultancy's index of term power contracts – typically for one- to three-year supplies – jumped to an all-time high of $110 a megawatt-hour this month, from $90/MWh in February. The volume of power purchased through the contracts in the March index was almost five-times that in February.

Energy Link managing director Greg Sise says the electricity market has seen high power prices before, but not for such a prolonged period.

The “massive risk premium” now built into futures prices is being reflected in bi-lateral contract prices, he told BusinessDesk.

Sise said declining hydro storage going into winter is “definitely a factor” in the higher prices, but fortunately, Lake Pukaki, the country’s biggest hydro reservoir, remains close to average.

He said the bigger concern is the reduced gas supply from the Pohokura field – the country’s largest - and whether Contact Energy will be able to secure sufficient fuel for its plants in Taranaki before winter.

Earlier this week, NIWA said recent rain had restored soil moisture to near-normal levels in northern parts of drought-stricken Tasman and Buller. But the institute’s Hot Spot measure still showed severe deficits in eastern Northland, northern Waikato, Thames-Coromandel and Bay of Plenty.

Metservice is forecasting heavy rain over the South Island – where the country’s biggest dams are - next week. Sise says a big increase in storage would be needed to mitigate the risk of reduced thermal supplies from Contact this winter.

“If we get a real dump of rain, the prices would come back,” he said.

OMV, operator of Pohokura, shut production from the offshore portion of the field for 12 days in February while it installed a drilling rig alongside the field’s production platform for maintenance. Another 18 days of production is expected to be lost, mostly when the rig is decoupled at the end of April.

OMV says work on the field’s wells is progressing “satisfactorily” and the firm will progressively bring each back into production. That will require flaring, or burning off, as part of the well clean-up process.

“We aim to minimise flaring to the absolute minimum but there will be three flaring events of approximately two days each duration during the campaign,” the company said in a statement.

“The first flaring event finishes today. This is the first offshore flaring at Pohokura since the original field development in 2006.”


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