19 Aug 2015

Glimmer of hope for dairy farmers

5:54 pm on 19 August 2015

A rise in international dairy prices over night will provide a glimmer of light for dairy farmers but they - and analysts - say they are not out of the dark yet.

Milk at Pak n Save Kilbirnie.

Photo: RNZ / Alexander Robertson

Prices in the global dairy trade auction jumped 15 percent and the key commodity, whole milk powder, soared 19 percent to $US1856 a tonne.

A main driver behind the lift was Fonterra reducing the amount of whole milk powder it put up for auction.

In recent months, dairy prices have plunged to an all-time low, forcing milk companies to slash their forecast payouts and putting a dampener on the economy.

Federated Farmers vice president Andrew Hoggard

Federated Farmers dairy chair Andrew Hoggard says farmers remain cautious. Photo: Radio NZ / Jemma Brackebush

Federated Farmers dairy chair Andrew Hoggard said the results were good for optimism, but everyone will be remaining cautious.

"It's good to get some hope and optimism. I wouldn't say everything is all rosy and super-positive just yet; it's a long road to recovery from where we were. We're still only at milk prices of $1800 and over the last few years the average has been up in the $3000 sort-of range.

"Even with this lift that we've seen, the expectation is that these prices, if they were converted through into the farm gate milk price, still only support a $3.85 [per kilo of milk solids] payout."

He said it would still be a hard road ahead for farmers.

"We've heard anecdotal stories of herds being sold, I've seen it around me. Two dairy farms not far from me have been put up for sale in the last year, one's been sold, one hasn't. I've heard anecdotal stories of people culling 1000 cow herd reducing down to 600 cows."

He said Federated Farmers representatives were meeting with Fonterra today, which was pure coincidence.

"With any luck we'll have a celebratory round of drinks first, but in all seriousness we'll be discussing the response around helping out sharemilkers, discussion around the GDT auction system, forecasting going ahead and some of the support things put in place for farmers."

AgriHQ's analyst Susan Kilsby said the NZX futures market indicated a rise, but the extent in which it did was a surprise.

She said the hefty reduction in volume of whole milk powder was the trigger required to turn market sentiment.

"It means the Fonterra milk price of $3.85 is now looking a lot more achievable, but we do need to see that milk supply slow down and a recovery in demand for a sustained recovery in prices."

Russia has also lifted some of its temporary bans on Fonterra's products after the botulism scare two years ago.

Ms Kilsby said this was good news, however there were still issues with the Russian market.

"There is quite a credit risk on getting paid for product going into that market. Also still difficulties at the border, you still see a lot of product being held up for various reasons. So it's still not an easy market to access and there are still a number of dairy companies and factories that are waiting for approval here as well.

"There is also the considerations of how much product New Zealand does want to put into that market, given so many other western nations are closed to that market, so there is come political constraints there as well."

China key to market strength

Rabobank analyst Michael Harvey said global dairy prices may not start to recover until early next year when China starts buying dairy products again.

Mr Harvey said prices may have hit the bottom but the market could be volatile for several months until China clears excess products.

"China's a huge factor. They are the world's largest importer of dairy products, generally about three or four times larger than the next largest importer in the world.

"When China's buying or not buying, it has a huge impact on the supply and demand balance in the global market, so that will certainly be one of the biggest triggers to a recovery is getting China import volumes stabilising."

Mr Harvey said he expected import volumes to stabilise early next year.

"The theory there is China's still working through excess product they have in the market place, we still think local supply in China is above demand at the moment.

"We see those factors turning slowly in the next few months, hence we see a stabilisation of trade in China early next year."

BNZ economist Craig Ebert said the recovery in global milk prices had a long way to go before the bank lifted its forecast for payouts to farmers.

"These are commodity markets and there's still a lot of negative factors globally, so we are not at all that the turning point's occurring just at the moment. It is our general story looking forward and again the auction overnight gave some impression that maybe we are close to a bottom at least."

BNZ's forecast of $3.80 per kilogram of milk solids is similar to Fonterra's own forecast of $3.85.

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