All posts by Grant Pedersen

Taranaki organic dairy farmers Stephen and Janet Fleming say the new payment system should encourage more farmers into organics.

Fonterra to pay organic milk farmers at market rates

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Source: Stuff

Fonterra’s organic farmers are set to cash in on potentially higher prices for their milk amid a “dramatic rise in interest and commitment to organics”, according to an industry rival.

The dairy co-operative has announced that from June its organic suppliers will be paid by one of two different systems: through an independent organic milk price linked to market returns, or – for possibly only the next two years – the current top-up system.

At present they receive the Fonterra price that all other farmers receive plus a bonus premium.

In the case of this season, that equates to $1.75 added to the farmgate forecast of $4.15 for a total of $5.90 per kilogram of milksolids.

It will be up to farmers to choose which payment system they want.

Fonterra’s global business manager for organics, Craig Deadman, said the price would be announced in late April-early May, at the same time as the farmgate price for conventional milk was announced.

He said there was increasing demand for organics and prices were higher and more stable than for conventional milk.

Per tonne, organic milk powder sells on the international market for more than NZ$14,000. By comparison, conventional milk powder prices languish at NZ$2900.

Fonterra launched a new organic policy last March and offered incentives for farmers to convert to organic systems, reversing a 2011 decision to concentrate its organics business in the Waikato.

Since then, it had achieved above its target for growth, although Deadman would not say what that was.

The company was hoping to process an extra 600,000 kg/MS during the next year.

The new payment system had come at farmers’ requests.

Fonterra’s decision to introduce a separate organic milk price is likely to prompt more Taranaki farmers to convert to organic farming, says one organic dairying champion.

Janet Fleming, a member of the new Fonterra Organic Farmers Advisory Group which provides feedback to the co-operative, has received lots of inquiries in the last three months from farmers considering adopting organic farming.

“This decision means the top level of Fonterra is recognising the importance of organics to the co-operative,” she said. “Organic milk creates profit for the whole co-operative, not just for organic farmers. The whole co-operative benefits.”

Organic farmers had been seeking a separate milk price for some time and she said it could be as much as double the price paid for conventional milksolids.

Fleming said Taranaki was one of the fastest growing regions for organic farming. About 15 Taranaki organic farmers supplied Fonterra and another five were converting their farms. Organic milk was collected daily in Taranaki and transported to the Waikato for processing.

Fleming said products to assist organic farmers were more readily available now than when she and husband Stephen started the conversion process in 2004, before there was an organic milk premium.

The couple milk 540 cross-bred cows on their two organic dairy farms comprising 184 effective hectares in the Pihama-Oeo area. They turned to organics because they wanted to be proud of the milk they produced and because it brought benefits to the environment, to their own health and to the health of their herd.

“Supplements are harder to get because we can’t use PKE, proliq or urea. But there are good options available for fertiliser. We still use fertiliser,” she said.

The chairman of the rival Organic Dairy Hub Co-operative of New Zealand, Bill Quinn, congratulated Fonterra on the move.

He said it would not take suppliers away from the hub because it was giving them a per kg price in the “mid-$7 mark” and critically that was paid in full the month following production.

“In the event Fonterra gets markets we haven’t got access to and end up paying a higher value, that’s good competitive growth,” Quinn said.

The hub is the principal supplier of organics to Lewis Rd Creamery. Its farmers are throughout the North Island and it does not operate any plant itself but uses contractors.

While Lewis Rd does not manufacture milk powder, the hub was in negotiations with a number of powder processors for the international market.

There had been a “dramatic” rise in interest from farmers.

“The hub has projections of in excess of 3 million kg of milksolids export grade product over the next three years, and we have in excess of 1 million kg of MS currently lodging paperwork with certificating agencies which also want to supply the hub,” Quinn said.

He said many of New Zealand’s farmers operated as system 1 or 2, which with minimal change could become organic.

To achieve full international market access, it usually takes three years to convert from conventional, but if farmers have not used palm kernel or urea, or other prohibited practices they can make the switch sooner.

Different markets also had different entry requirements for organic products “so we can target milk to processors that meets their requirements”.

Deadman said by linking the organic milk price to organic market returns, more farmers would become organic.

Fonterra had undertaken a series of measures recently to enhance the attractiveness of organic farming for current and prospective organic farmers.

“A recent initiative is the establishment of the Organic Farmers Advisory Group, a representative group of organic farmers who provide an additional feedback channel between organic farmers and Fonterra. They also had provided feedback on the new organic pricing system,” Deadman said.

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Palm kernel imports rise

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Source: NZME

Imports of palm kernel (PKE) – which Fonterra is keen for farmers to cut back on – rose slightly in September compared with the same month in 2014.

PKE imports came to 213,488 tonnes in September, up 0.8 per cent from 211,709 tonnes in September 2014, according to data from Statistics New Zealand.

Fonterra said last month that it wanted to “future proof” the co-operative’s position as a world-leading and trusted producer of pasture-based milk products. The co-op put forward a recommended maximum of 3kg/per day/per cow was a guideline.

Palm kernel has become a useful standby for farmers, particularly during abnormal weather, when consumption can go up to 10kg a day.

The product came into its own in 2007 when a drought sent North Island farmers looking for new feed sources, marking a step change for palm kernel as a viable feed supplement.

Imports of palm kernel – a byproduct of the palm oil process – have gone from 96,000 tonnes in 2003 to 2 million tonnes last year.

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Pressure on declining milk production

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Source: NZME

The decline in New Zealand milk production gathered momentum in the month of September, according the Dairy Companies of New Zealand (DCANZ) data.

Milk production, in milksolids, came to 209,484 tonnes in September, down 7.2 per cent compared with 225,777 tonnes in September 2014.

A late autumn flush led to higher production in the earlier months but the trend turned in August, when production fell slightly compared with August in the previous year.

Fonterra, in a market update released earlier this month, said New Zealand production decreased by 1 per cent in August compared to the same month last year.

The co-op said that although milk production in the year to August was up 1 per cent, unfavourable spring pasture growth conditions and low milk prices continued to put downward pressure on milk production.

The GlobalDairyTrade’s four-auction winning streak came to an abrupt end last week when prices fell by 3.1 per cent, led by declines in whole milk powder, skim milk powder and butter.

Fonterra has a $4.60 per kg of milksolids farmgate milk price forecast on its books – well short of the $5.30 per kg required to reach the estimated average breakeven point.

Fonterra has forecast its milk production to fall by 5 per cent this season and some forecasters expect New Zealand’s total production to fall by as much as 10 per cent.

October is typically the peak of the season for local milk production.

Prices have risen at a third consecutive GlobalDairyTrade auction.

Prices rise 16.5 per cent at Fonterra GlobalDairyTrade auction

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Source: Stuff

Economists are upgrading farmgate milk forecasts after being surprised by the fastest dairy price increase in five years.

Prices soared 16.5 per cent at the GlobalDairyTrade auction overnight, pushing the index to US$2568 ($4037) a tonne.

Milk production is expected to weaken throughout the season, putting more upward pressure on dairy prices.

Milk production is expected to weaken throughout the season, putting more upward pressure on dairy prices.

The third consecutive increase after months of falls is welcome news to struggling dairy farmers, with further rises expected as production weakens.

The key whole milk powder price was up 20.6 per cent to US$2495 a tonne.

There were 186 bidders at the auction, with 36,050 tonnes sold, up slightly from the 35,865 tonnes at the start of the month.

ANZ hiked its forecast payout by 50c to $4.25-$4.50 per kilogram of milksolids.

ASB’s bullish forecast was already at $4.50, and rural economist Nathan Penny said the bank had revised it to $5..

“We’d expected a strong one, but it’s on the strong side of what we’d factored in,” he said.

Penny said much had been made of Fonterra’s decision to cut back on auction volumes, which had played a part in the auction result.

“[But] the main story in town is the fact that production is shaping up to be materially weaker this season,” he said.

“As that information is firmed up, we expect prices to kick on.”

A poor spring had resulted in below average grass growth, with an increase in slaughtering also likely to lower production.

“We also know that many plan to cull further once we’re fully through calving and the peak of milk production,” Penny said.

Federated Farmers dairy chairman Andrew Hoggard said the result could mean a recovery in dairy prices was solid.

“But at the same time we still have to be cautious because we are into the season now, and a lot of the product’s already been sold and forward contracted at lower prices.”

He did expect the latest string of results to mean a bounce back in payout for farmers later this season, even if the GDT lifts continue.

“It’s still going to be a tight end of season payout, with any luck it’s looking better what than it currently is.”

He put this latest lift down to simple supply and demand. Overseas buyers had realised that it was likely less milk would be produced this season and were buying accordingly.

The federation’s vice-chairman and Waikato president Chris Lewis said it would be an understatement to say farmers were happy with the result.

“They’ll also be wary that we’ve just had 10 in a row of negatives,” he said. “It’s been a year of up and downs.”

Lewis said the price to watch was US$3500 a tonne, a level last seen more than a year ago.

“If it hits that before Christmas, then the financial pressure will come off farmers a little bit this season.”

AgriHQ revised its forecast farmgate milk price to $4.65 per kilogram of milksolids, up 46c.

Analyst Susan Kilsby said the larger-than-expected increase was partly driven by lower volumes.

The amount of whole milk powder offered at the Tuesday night auction was 43 per cent lower than the same time last year.

Kilsby said El Nino conditions were also highly likely to continue through the summer.

“Buyers are aware that a drier than normal summer will slow milk output in New Zealand, therefore we are starting to see a little more urgency from buyers wishing to secure purchases.”

Fonterra’s current farmgate forecast is $3.85, well below the break-even point for most dairy farmers.

The New Zealand dollar rallied slightly on the positive result, climbing to US63.47 cents from US63.28 cents at 5pm on Tuesday.

Waikato Federated Farmers president Chris Lewis says a discussion needs to be had over whether the GDT should be temporarily suspended in the wake of falling dairy prices.

Calls made to suspend Fonterra auctions to stop dairy price freefall

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Source: Stuff

The latest fall in milk prices on Fonterra’s GlobalDairyTrade has prompted farming and agribusiness leaders to question whether the auction should be temporary suspended until milk prices stabilise.

Prices fell 9.3 per cent after the latest GDT on Wednesday , the 10th consecutive fall and bringing them to levels not seen since 2002.

The dairy sector is New Zealand’s biggest exporter, with sales of milk powder, butter and cheese were worth about $12 billion in the the past year, down 24 per cent on the previous June year. The slump in dairy prices has seen the New Zealand dollar fall sharply this year and the Reserve Bank cut interest rates, with more expected.

Dairy prices have fallen again at the latest dairy auction.

Dairy prices have fallen again at the latest dairy auction.

The slump in dairy prices means few farmers will be making money, with farmers facing two seasons of low prices.

Temporarily suspending the GDT was a “reasonable question” to ask, given the unprecedented and volatile times the industry faced, Waikato Federated Farmers president Chris Lewis said.

The auction was exacerbating dairy market volatility and the extent of the drop, he said.

“It’s a major contributor to the decline. It’s been gamed by buyers and the price for that is being paid by [the] New Zealand farmer.”

He called for an industry-wide discussion on whether it should be temporarily suspended until the market improved.

He said Fonterra should have halted the auction when whole milk powder prices reached $2000 a tonne.

“That would have been leadership. They should have said: ‘That is our reserve, buy our good quality product at no less than $2000′.

“It’s madness, devoid of any common sense to keep [the] GDT operative in these times.”

Such a move was not unprecedented. The Chinese government suspended their stock exchange to hold its value when it shares plummeted, he said.

The only mechanism left for Fonterra farmers to vent their frustrations were the director elections later this year, he said.

Lewis, an Open Country Dairy supplier, described the latest GDT fall as “beyond belief”.

It meant Fonterra was advertising farmers’ milk solids for sale under $3/kg milk solids.

“Who could ever or would ever advertise their suppliers’ raw material for sale at less than half the cost of production? Fonterra are, through their GDT platform, telling all of the global buyers they will sell farmers milk at half what it costs their farmers to produce. It’s as simple as that.”

The latest result also confirmed there will be a fall in the milk price when Fonterra update their forecast on Friday.

“The question is how much will it drop. It’s so depressing now that you don’t want to put a figure behind it.”

He estimated it would fall to somewhere between Westland Milk Products’ forecast of $4.60-$5/kg MS and Open Country Dairy’s $3.65-$3.95/kg MS.

The call was backed by OCD chairman Laurie Margrain who said the GDT, and its influence on the market, needed a robust review for the good of the industry. Its impact on the milk price and therefore farmer incomes was significant and worthy of a robust review.

“I wouldn’t say that it should be suspended or done away with, but it does need a very robust look at market prices, market behaviour and the outcomes its generated.”

He said the GDT tended to proliferate the current downward spiral of dairy products.

Waikato University professor of agribusiness Jacqueline Rowarth also supported Lewis.

“The only way to stop the slide is to say we’re not trading anymore and I have been saying for several weeks to stop the auction.”

However, Fonterra’s managing director of global ingredients, Kelvin Wickham said in a statement that the GDT had not caused low prices. Nearly all of the product offered on the most recent GDT sold to willing buyers.

“Low prices are a reflection of the market which is currently oversupplied with dairy product while dairy importing countries face political, social and economic challenges. Suspending GDT would not solve the supply-demand imbalance.”

As well as the price index falling by 9.3 per cent, New Zealand’s main exports of whole milk powder and skim milk powder fell by 10.3 per cent and 14.4 per cent respectively.

The average sale price was US$1815 a tonne and many of the products failed to move from their opening prices, which Fonterra sets at 15 per cent below the previous auction price.

This outcome followed disastrous results from the previous auction on July 15 when the price index suffered 10.7 per cent fall.

ASB rural economist Nathan Penny said very few farmers would be producing profitably with dairy prices this low.

“The last time they were this low was around 2002,” he said.

“Prices are a bit of a falling knife at the moment and no one is keen to catch it.”

He said there were a few indicators of prices recovering in the future but when that would be was difficult to say.

Production may slow given little money would be made at current levels and there was also the risk of dry weather coming up this season, Penny said.

Based on the auction overnight, ASB expected Fonterra to place its price for the 2015-2016 season around $4 when it makes its announcement on Friday.

Penny said there were some risks Fonterra would go even lower than that but he did not expect it to be the final call for the season.
AgriHQ dairy analyst Susan Kilsby said farmers now faced two consecutive seasons of extremely low milk prices.

“Very few farmers will be able to turn a profit at such a low milk price,” she said.

“A $1 per kilogram milk solid drop in the milk price equates to approximately $2 billion less income for dairy farmers.”

UNDERSTANDING THE FALL

Penny said the main reasons why dairy prices have been going south are:

Supply: there is an oversupply of milk globally. New Zealand is a leading exporter and it has had two big seasons back to back. The 2013-2014 season grew by 10 per cent when production was normally growing closer to 3 per cent, Penny said.

Growth in the season just gone was 3.6 per cent, despite the low milk prices.

Supply is also strong in Europe and China, New Zealand’s big dairy market.

Penny said China was a big producer of dairy as well, reaching double digit production growth over 2014 and resulting in New Zealand whole milk powder exports to China falling by over half.

“That reflects the fact that China’s own production has been really high and they are able to stock up on their products earlier on. Now they’re well-stocked so they don’t need to come to the market to buy,” he said.

Demand: China’s growth has been weak with concerns in the country’s share market and weaker industrial and manufacturing data painting a picture of China’s economy slowing down.

Demand was also weak in Russia and Brazil, with India being the only positive market in the mix, Penny said.

New Zealand tends to look to developing markets to grown its own exports and for now, those are not doing well, he said.

Sentiment: “Buyers are not willing to catch the falling knife at the moment,” Penny said, pointing to the potential buyer mentality of: “What’s the point if prices are falling? You can just wait til next time and buy then”.

Open Country Dairy is New Zealand's second largest dairy exporter.

Open Country Dairy slashes milk price forecast

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Source: Stuff

New Zealand’s second biggest milk processor Open Country Dairy has slashed its milk payout forecast by more than $1kg for the season as industry pessimism deepens about the multi-billion dollar dairy sector’s earnings outlook.

Open Country had until last week been forecasting a milk payment of $4.75-4.95kg milksolids to its around 700 national supplier farmers.

Now it has told its farmers to instead bank on $3.65-$3.95kg.

Industry milk price setter Fonterra, which collects the lion’s share of the country’s raw milk from farmers, is still forecasting a season milk price of $5.25kg.

Fonterra, the country’s biggest company by revenue is expected to downgrade this forecast on or about August 7.

The expected milk price forecast slump is on the heels of last week’s Global Dairy Trade auction result where prices plummeted 10.7 per cent to US$2082 tonne, the lowest level in six years and continuing a string of falls this year. Fonterra-owned GDT is considered a barometer of international dairy prices.

Economists slashed their forecasts as a result of the latest GDT result with the country’s biggest rural lender ANZ Bank downgrading its milk price prediction for the season to $3.75-$4kg.

Waikato specialist dairy accountant Nigel McWilliam of Diprose Miller said the real concern around Fonterra’s expected August 7 downgrade announcement was the inevitable cut in the early season advance rate.

The season forecast related to a 16 month period, but with farmers currently borrowing $1.50-$2kg for working capital, the advance rate was the key focus now, he said.

Finance Minister Bill English says the dairy industry faces a "perfect storm" creating an international glut of product.

Dairy industry facing a ‘perfect storm’ of excess supply warns Bill English

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Source: Stuff

Bill English says China is sitting on “mountains” of excess dairy product, part of a global glut, but he remains confident prices will recover this year.

Dairy prices hit a six year low in July amid global oversupply, sending the kiwi dollar plunging to the lowest level in six years against the US dollar.

The Finance Minister, fresh from a week long trip to China, New Zealand’s largest export market, said that there was a picture of an international glut of dairy products which would keep prices lower for some months to come.

In recent weeks the US Department of Agriculture had highlighted an increase in stocks of dairy prices being stored in China.

“It appears there’s been almost literally a mountain of milk powder in warehouses around China, more than people thought so it might take a bit longer to work through,” English said.

“The way it’s been described to me, there’s been a perfect storm of excess milk supply, influenced by events in Russia, Europe, in China, in New Zealand, Australia and that’s led to these prices which I think everyone regards, everyone believes are too low for the health of the dairy industry, whether it’s here, in China or in Europe, but it is going to take some time for the prices to pick up.”

English remained confident that there would be a recovery in dairy prices some time in 2015.

“I don’t think there’s much doubt that they’re going to pick up, it’s just a matter of when and how fast.”

Estimates ranged from picking up in a few months to remaining flat until Christmas, English said.

“I haven’t seen any estimate that it would take years to clear up.”

Despite the fall in prices English said there were no plans for the Government to provide direct financial support for farmers, or active steps to diversify the economy, preferring to leave this to the market.

“The market’s sending some pretty strong signals. It would be hard for the government to do much better I would have thought,” English said.

“When you get high price products it’s not surprising that people produce a few more of those products but I think the dairy industry’s been pretty realistic that the very high prices that they were getting weren’t going to last.”

Labour finance spokesman Grant Robertson said English’s stance was “recklessly complacent” and steps should be taken to reduce the economy’s reliance on dairy.

“The Government’s had six and a half years to diversify the economy and they’ve failed to do it. They were warned that there would be a global dairy glut at least 18 months ago and they failed to respond to that,” Robertson said.

“This is not just about the farmers themselves who are doing it tough, it’s about the regional towns and communities around those farmers who are also looking at billions of dollars gone from their economy.”

– Stuff

Colin Glass CEO of Dairy Holdings Ltd.: "We are just hunkering down and making sure our costs of production are in order."

Dairy Holdings: simple business model maintaining a competitive advantage

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Source: Stuff

World dairy prices are in the doldrums, Kiwi farmers are experiencing the tightest cashflow in 25 years and Fonterra has just cut more than 500 jobs, but Colin Glass, chief executive of Dairy Holdings, the country’s largest dairy enterprise, has an air of calm about him.

“We are just hunkering down and making sure our costs of production are in order,” he says.

“Dairy Holdings operates on a simple business model that generates cash year in, year out and has withstood risk. It revolves around efficient irrigation systems on-farm and managing nutrient limits; that way farms grow the feed themselves, winter cows and maintain a competitive advantage.”

But he knows times are going to get tougher before they get better.

Fonterra’s initial forecast for 2015/16 was $5.25 per kilogram of milk solids (KgMS), up $0.85 on the previous season. However, with the Global Dairy Trade (GDT) down 34 per cent since March, the forecast is looking more and more challenging.

“There will be little or no cash coming to any dairy farmer between now and October,” Glass says. “This means we will be lucky to get $4 in cash this upcoming season and most of that comes around Christmas. Most dairy farms have been enjoying cashflow from the previous season, so it’s only just starting to bite.”

The industry went through a period of high international milk prices well in excess of $5500/tonne for milk powder, and all around the world, regardless of system, dairy farmers made money, he says.

“On the back of that there was significant increase in production. The United States (US) is growing at 2.5-3.5 per cent per annum despite a terrible drought in the west – it’s going gangbusters. And US farmers have margin protection insurance in place, so they can withstand prices falling. This has become a game-changer. New Zealand’s competition is the US. So far all US production has been sucked up internally, but this will change.”

“One third of New Zealand’s milk goes to China, which is struggling. Until we see it re-enter the market, things will be tight. It’s been buying a low volume of milk powder the past 12 months so there has been a massive reduction in dairy trade prices. There remains product out there internationally that has to be cleared.”

Dairy Holdings Limited (Dairy Holdings) is a New Zealand-registered company with 100 per cent of its farming assets in the South Island. It is managed through a head office in Timaru.

The company began in 2001 with the purchase of two major South Island corporate farming entities: Tasman Agriculture and Dairy Brands Ltd. Since then the company has mainly operated in Canterbury and North Otago, with a further eight dairy units in West Otago and Southland and five spread between Springs Junction and Murchison.

The company owns 58 dairy farms (13797ha), 53 of which supply Fonterra and five the Westland Co-operative Dairy Company. Spread across the farms are 46,000 cows of which 32,000 are owned by the company and the balance supplied by sharemilkers and contract milkers.

The company also owns four large-scale heifer grazing blocks, and rears and grows out approximately 7500 heifer calves and 8000 in-calf heifers each year. It owns or leases 14 grazing and dry stock blocks used for carry-over cows and winter grazing.

Three operations managers and five supervisors oversee the day-to-day operations, each being responsible for approximately 10 farms. All farms are budgeted to produce 16m kg/MS in the season ending May 31, 2016.

Career progression is a big part of the Dairy Holdings philosophy. By changing the model, the company enables people to build stock and grow on the farm they are working on. This encourages capability and herd quality, Glass says.

“Around 2010, with the South Canterbury Finance troubles, we stopped growing, but the capabilities of our staff moved ahead. It was as if the industry had been growing so fast, people were being promoted beyond their capability. This was a huge insight for Dairy Holdings.”

In 2008/09 dairy prices “tanked”, but the subsequent year became one of the company’s strongest. Dairy Holdings went into the year expecting the worst so had its cost structures under control. But in contrast with this current year, interest rates had halved, and urea prices peaked at $1111 per tonne. Then the dollar went from 80c to 50c and urea prices dropped to $600.

“Dairy Holdings didn’t have to change anything on-farm, so long as it stuck to its knitting,” Glass says.

“This time round, there are no significant price reductions on the horizon. The changes towards resilience are a lot tougher. Our shareholders are all Kiwi farming families with a long-term view of farming and they recognise the need to put systems in place. If a business is profitable, it’s amazing what ups and downs it can deal with.”

Dairy Holdings has not jumped on the dairy barn bandwagon but taken a long-term view of where New Zealand’s competitive advantage is. This has involved investing heavily up and down the value chain eg. Ravensdown, Fonterra and its support blocks.

Its young stock are on grazing units in Mid-Canterbury and the company is trying to nail down its wintering ground. Not wanting to be reliant on the market, its aim is to be as self-contained as possible. Over the past decade, most of the appreciation in farm cost of production has been in feed and grazing.

“This year’s early autumn period was dry and winter feed crops were struggling,” Glass says. “But because we had wintering blocks geographically spread, we were able to winter the same number of cows as last winter, despite growing conditions being quite different. We maintained costs and kept control; it was our way of weathering the storm.”

New Zealand’s competitiveness in the world scene has changed quite markedly, he says. Today poses difficult times for operators who don’t have costs under control and the farms that buy the greatest quantity of feed are the ones under the most pressure. The farms that harvest the most pasture per hectare are the most productive.

“We have chosen the pasture approach; we want simple systems in place that can replicate our performance year after year. That for us is the key; why New Zealand has been so strong in dairy. It’s because of the work in the 1950s, 60s and 70s by our scientists, who led the world in pasture research, and to whom we are indebted.”

Many dairy businesses are just milking platforms, he says, and value can get captured elsewhere. Winter grazing is as high as $28-$30 per head per week and these costs are rising at a greater rate than the milk price. This past season they haven’t softened due to supply and demand from the large number of dairy conversions.

“This is not necessarily bad,” Glass says. “It shows how big dairy is in Canterbury and why Dairy Holdings needed to invest in support blocks to take control.”

“We look at New Zealand’s strength and in our view the country is more removed from the market than anyone else. Our strength and reason for being is to grow pasture, and have our cows outside for 12 months of the year. Any time you introduce a machine between the cow and her feed, you introduce costs, which diminish your competitiveness on the international stage. Nationally, by introducing more and supplementary feed, we are doing more production but are we any better off? This is the question everyone needs to ask.”

GlobalDairyTrade-auction

No relief at Fonterra’s GlobalDairyTrade auction

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Source: Stuff

A mixed bag of results from the GlobalDairyTrade auction overnight saw dairy prices fall for the seventh consecutive time.

The price index fell by 1.3 per cent and the average sale price dropped 0.1 per cent to US$2409 ($3447) a tonne.

Butter, butter milk powder and cheddar increased while both skim and whole milk powders fell.

Anhydrous milk fat suffered the biggest fall, dropping 8.9 per cent.

Analysis firm AgriHQ decreased its 2015-16 Farmgate Milk Price by 14c to $5.50 per kilogram of milksolids following the auction.

Waikato Federated Farmers president Chris Lewis said international traders and buyers would have to get the message soon that New Zealand’s dairy production would not be dramatically increasing in the new season.

“You have to wonder when the worm will change direction.”

People in the food business needed to buy dairy ingredients to make a dollar and Lewis predicted that some time in the next few months they would “have to put a stake in the sand” and start buying again.

He also took solace because this latest fall was the smallest of all of the seven drops that had occurred so far. The Northern Hemisphere was starting to hit its peak production and he expected to see a more positive result in the next few auctions when that milk flow started to drop off.

Fonterra offered just 10,000 tonnes of whole milk powder, the least amount made available this year to date.

ASB rural economist Nathan Penny said this was probably the biggest let down in this auction.

“We were expecting a bit more of a bounce but we didn’t get that so that’s sort of slightly disappointing.

“Traditionally this auction is the smallest auction of the year. It’s getting down to the point where production is lowest so you’d expect when production is low at this time of year, that is reflected in auctions and you’d get a bit of seasonal movement in prices.”

Penny said the end of the season has surprised markets somewhat with a stronger than expected performance.

“We had the drought but that was very short and sharp and over March, April, May production recovered and increased versus last season. This has meant there has been a late flush and markets hadn’t factored that in,” he said.

ASB predicted the current season of milk to last another month or two, after which dairy prices should start to lift.

The last time prices lifted at the auction was March 3, 2015, when the index crept up 1.1 per cent.

It also predicts production in the new season to be lower than the same time last season.

“We do need prices to lift so if we’re keeping a lid on production this new season, prices will lift and that should help farmer incomes more than if they would increase production,” Penny said.

The quantity of whole milk powder is expected to rise from July, which AgriHQ dairy analyst Susan Kilsby said would make it harder for dairy prices to lift.

“It will become harder for prices to recover as the volume of milk powder on offer increases as the new dairy season progresses,” she said.

A drop in the New Zealand dollar last week following the official cash rate cut was good news for farmers.

“A weaker New Zealand dollar is welcomed by our dairy farmers as this improves returns at the farmgate and helps to reduce the impact of the very low milk prices,” Kilsby said.

The kiwi currency remained stable overnight, at US69.91c and A90.27c on Wednesday morning.

It was trading at US69.96c and A90.11c late Tuesday afternoon.

Farmers face ‘brutal’ time as Fonterra cuts price forecast

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Source: Stuff

Federated Farmers have predicted the next six months will be “brutal” for dairy farmers as they cope with tight cash flows following Fonterra’s announcement of a cut in this season’s milk payout price to $4.40 per kilograms of milk solids.

Fonterra has announced an opening forecast farmgate milk price of $5.25 per kilogram of milk solids for the 2015-16 season, slightly higher than commentators were predicting.

This does not include the forecast earnings for the 2015-16 financial year.

However the co-operative at the same time reduced its forecast farmgate milk price for the 2014-15 season to $4.40 per kg/ms, down from its previously announced forecast dividend range of 20-30 cents per share.

The change amounts to a forecast cash payout of $4.60-$4.70 for the 2014-15 season that would be paid to a fully shared-up farmer.

Chairman John Wilson said the revised forecast reflected the reality that global commodity prices had not increased as expected.

Federated Farmers dairy chairman Andrew Hoggard said it was disappointing to see the drop in the 2014-15 return. Cash flows would be tight for the next six months at least, with the advance rate beginning at 70 per cent of the forecast farmgate milk price – an opening rate of $3.66 per kg/ms.

“It confirms what we already know, and that is that the next six months are going to be brutal,” Hoggard said.

The advance rates Fonterra pays are just $3.66 for June, July and August. It is not until January that the advance rate hits $4, but farmers will not receive that payment until February.

Hoggard said the message was the same to farmers as it had been for months.

“We all know there is volatility, now we’ve been rudely awoken to it. Farmers need to focus on the long term, and make sure they’ve got support,” he said

Rabobank economist Hayley Moynihan said the prices were “largely as expected”, reflecting the fact any recovery would not occur until later in the season. She said Rabobank was standing behind farmers.

Wilson said world markets were over-supplied with dairy commodities following good growing conditions in most dairy producing regions.

“This is a tough season and we will continue to keep our farmers informed as the season draws to a close given the current volatility,” said Mr Wilson.

The forecast farmgate milk price change for the current season will mean a further revision to the advance rate schedule of monthly payments to farmers.

Wilson said the forecast farmgate milk price for 2015-16 was based on Fonterra’s best view of long-term global dairy supply and demand.

“We can expect prices to recover going forward, and to see a rebalancing of supply and demand over the season. However it is more difficult this early in the season to determine exactly when this recovery will lead to a sustained price improvement,” said Wilson.

ASB economist Nathan Penny agreed with Hoggard that the Reserve Bank would cut the official cash rate in September and October. Penny is predicting it will be cut by a total of 50 basis points.

Fonterra chief executive Theo Spierings said the long-term fundamentals of global dairy demand were strong.

“Our forecast for the new season takes into account a range of factors including global milk production forecasts, the economic outlook of major dairy importers, current inventory levels and geopolitical events,” Spierings said.

“Given the season we are coming out of, we are absolutely focused on improving farmer returns and driving the co-operative’s performance,” he said.

Meanwhile the Greens have called on Landcorp to stop converting forests to dairy farms or risk doing serious damage to the rural economy.

“Landcorp needs to stop the dairy conversions until they can show how undertaking more conversions stacks up economically in the face of the lower forecast milk price. All the information that we’ve seen so far suggests that, in fact, dairy conversions may be hurting other farmers financially,” Green Party MP Catherine Delahunty said.

Landcorp is in the process of converting 25,700 hectares of forest to dairy farming in the upper Waikato River catchment area alone, at a cost of $87 million.