Weak global milk prices may rebound sooner than expected as supply meets demand, Guy says

Thursday 9th June 2016

Weak global milk prices may head higher sooner than expected with supply coming back into balance with demand, as farmers in New Zealand and Europe pull back production and global demand continues to grow, New Zealand Primary Industries Minister Nathan Guy has said.

New Zealand dairy farmers are heading into the third season of weak farmgate milk prices, below the level required for the average farmer to break even, amid weak demand from China and oil-producing countries, and as global supply is bolstered by a Russian ban on European Union products and the lifting of European production after quotas were removed. Guy told parliament's primary production select committee that expectations for softer European and New Zealand production over the coming year combined with continued growth of 2 to 3 percent in global demand means prices are likely to pick up.

"At the moment, we've got a period of the world being awash with milk," Guy said. "If we have some softening of supply out of the European Union and some softening of supply out of New Zealand, it wouldn’t take much to correct that supply-demand imbalance and find that our price rises quicker than what many may suspect."

Despite a recent pick up in prices on the GlobalDairyTrade platform, Guy said a period of volatility was still in front of us and depressed prices may continue for a bit longer.

"Hopefully, come mid-way this season or into 2017 we start seeing things improve," he said. "Everyone in New Zealand might breathe a sigh of relief."

Guy said he still sees the medium to long-term outlook for the dairy industry being "very bright".

"Every time we have had a big peak we have tended to have quite a slide back down the other way. This slide has been beyond anyone’s expectation, it’s been lower for longer," he said. "We know that there’s a lot of pain out there, particularly for individual dairy farmers that have quite a high level of debt, we know it’s very tough for sharemilkers around the country as well."

However, Guy said farmers needed to focus on their production costs, which have risen.

"Farmers have got to use this opportunity to focus back inside the farm gate to grow grass more efficiently, to harvest it at the right time, to actually put that milk in the vat more efficiently, that’s where we can be a world leader, in my view we are still one of the top of the world and most efficient producers of milk but in some cases we have gone into a high input system," he said. "Now’s the time to refocus back inside the farm gate, ensure that we have got our costs appropriately set, that we are growing more grass and harvesting it efficiently."

The average cost of production has declined to $5.25 per kilogram of milk solids from $5.50/kgMS in the past 12 months, and is likely to continue to decline, he said.

The government has commissioned an independent study to investigate the farm systems of farmers who can sustain a $4/kgMS milk price, and expects to be able to share that information with other farmers in the next three to six months.

Fonterra Cooperative Group, the country's dominant milk processor, expects to pay farmers $4.25/kgMS to its milk suppliers for the 2016/17 season, up from $3.90/kgMS in 2015/16.

"It will be very tough for farmers to sustain another period of low prices, I’m hopeful that we can get up around $5/kgMS through this season that we’re currently in," Guy said.

While dairy farm land values had softened in the last 12 months, there haven't been a huge amount of dairy farms for sale, suggesting banks are supporting their farmers on optimism about the medium to long-term outlook for the industry, he said.

"Those on the margins will find it very very tough where they are highly geared, they have got a huge amount of debt, and they will be the ones that are sitting down, almost on a weekly basis with their banks, doing their line by line cashflow analysis," Guy said.

BusinessDesk.co.nz

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