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ph +64 6 323 6393 email [email protected] web agrihq.co.nz
MONTHLY DAIRY
OCTOBER 2017
Dairy commodity markets 2
Milk production 7
Milk price 10
Dairy company share prices 12
Inside this issue
Susan Kilsby AgriHQ now expects no growth in NZ’s milk supply this season. Spring production has been poor due to the damage done to soils and pastures in the past few months when conditions were excessively
wet. Peak milk intakes are expected to be the lowest seen in recent years.
News that NZ’s milk supply is down seems to be falling on deaf ears as there is little urgency from buyers - aside from the Chinese - to secure product. The demand from China is more related to the low tariff window than due to fears of reduced supply.
As we are right at the seasonal peak in NZ’s milk supply there certainly isn’t any shortage of product right now, but in the coming months supply is expected to tighten. So far Fonterra has managed to find enough product to actually lift its whole milk powder (WMP) offerings on Global Dairy Trade so it is easy to see why buyers are not concerned about
immediate supply. Dairy markets in general have softened over the past
month on the back of solid growth in European milk. Prices for virtually all commodities have tracked down. This has brought butter pricing down from the dizzy heights seen earlier this year – although prices still remain high. Skim milk powder (SMP) prices dropped when the intervention scheme closed its buying for 2017. Rumours that the European Commission won’t be purchasing SMP next year at the standard fixed price have been bearish for this commodity.
WMP pricing has softened but is generally holding near the US$3,000/t level. This price level is not sufficient to reach the milk price Fonterra has forecast this season, although farmgate returns will be assisted by a lower NZ dollar. The NZ dollar fell sharply on the news that a left wing Labour, Greens, NZ First coalition will govern New Zealand for the next term.
Zero growth for NZ’s milk supply
NZ MILK PRODUCTION FORECAST2017-18
0%
AGRIHQ WMP PRICE (US$/TONNE)
3050
NZX WMP FUTURES NOVEMBER 2017(US$/TONNE)
2975
AGRIHQ MILK PRICE 2017-18(NZ$/KG MS)
6.36
Amy Castleton
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MONTHLY DAIRY OCTOBER 2017 PAGE 2
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Dairy commodity prices starting to slip
Dairy commodity prices are starting to slip back as European milk production has started to improve at an accelerated rate. Dairy commodity prices had been expected to remain largely stable until Christmas, so the price falls are a bit earlier than expected. However European milk supply has stepped up in recent months resulting in expectations that supply of commodities will also improve. Buyer demand has been holding for the short term, with many buying hand to mouth across the commodity complex. However buyers are tending to wait to see where prices go before purchasing too much for 2018 delivery.
From a NZ perspective the recent easing of whole milk powder (WMP) is not justified, as buyers appear to be taking no notice of the fact that NZ’s milk production is performing poorly through the critical spring months. However many forecasts are still for NZ’s milk supply to lift this season, so buyers seem to be confident of availability. Any tightening in the supply of WMP won’t be felt for a few months yet as we are presently at the seasonal peak in NZ’s milk supply.
The milkfat market does remain at elevated levels although butter prices have come down. Anhydrous milkfat (AMF) remains at just about record levels, but on a milkfat content basis it is still slightly underpriced relative to butter.
European butter slumpsEuropean butter prices have dropped about
US$1000/t over the past month. European butter has been very overpriced relative to other regions, but even with the step down to the current level of US$7200/t, European butter is expensive relative to Oceania or the US.
Butter prices in Oceania and the US have also eased, but to a much lesser degree. Oceania butter is now averaging around $5700/t, while US butter is around US$5200/t.
Fundamentals of the milkfat market are unchanged – that is, production is still down, and demand is strong, particularly at the consumer level.
Fat prices were expected to stay high until at least Christmas, after which European milk production would be heading towards its peak and thus more butter would be produced. The decline has therefore come a little earlier than expected. Expectations are that prices may nudge down a little further, but they are unlikely to drop right away due to the underlying demand.
Butter production is still not likely to increase much until early next year as the milk is still not available. European milk production is now starting to trend up against last year, but commodity production is still trending
US$ TONNE 23-Oct-17 25-Sep-17 24-Apr-17 24-Oct-16 26-Oct-15
Butter 5800 6100 4890 3980 3100Skim milk powder 1800 1950 2025 2300 2250Whole milk powder 3050 3125 3200 2860 2800Cheddar 4050 4100 3450 3475 3300Casein - Acid 7000 7300 7500 7200 6500AMF 6800 6750 5930 5100 3950Weighted average 3217 3322 3232 2961 2766
DAIRY COMMODITY MARKETS Buyers ignoring NZ milk production figures
Butter supply still shorthighlights
Results from auction – October 17, 2017
Contract Period Shipping Month
1 2 3 4 5 6 All Contracts
Nov Dec Jan Feb Mar Apr
AMF 7540 7053 6710 6648 6555 0 6841BMP 0 0 0 0 0 0 0BUTTER 6140 6075 5384 5385 5335 0 5736CHEDDAR 4200 4110 4079 4100 4175 0 4107LACTOSE 0 0 0 0 0 0 0REN CAS 5739 5544 5507 5700 6029 0 5612SMP 1860 1849 1752 1749 1758 0 1797WMP 3083 3071 2936 2923 2935 0 3014
GDT price index 1039
GDT prices averaged across all grades/specifications and suppliers
Source: AgriHQ
1000
2000
3000
4000
5000
6000
7000
8000
Aug 15 Feb 16 Aug 16 Feb 17 Aug 17
US$ pe
r Ton
ne
Source: AgriHQ
Dairy Commodity Prices
SMP WMP AMF
0.7
0.8
0.9
1
1.1
1.2
1.3
Aug 15 Feb 16 Aug 16 Feb 17 Aug 17
Source: AgriHQ
Product Mix Value Comparison
WMP/WMP SMP+Butter/WMP SMP+AMF/WMP
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MONTHLY DAIRY OCTOBER 2017 PAGE 3
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behind. European butter production was 1% down year on year in August, and it is still 6% behind year to date.
There is still plenty of demand for milkfats. Buyers are buying short, meaning they have a constant need for more product. Usually we would see buyers starting to pull out of the market once prices start to drop, as they wait for prices to come back further as sellers become more aggressive. This normally results in a sharp decline. However this is not happening this time around, so any further decline in price is likely to be steadier.
It’s expected that there will still be plenty of demand for product for immediate delivery. There is not a lot available so it’s unlikely that prices will crash.
The trend in consumption patterns towards more full-fat products has meant that the fat market has gone through a structural change. So while prices will come down, they are unlikely to come back to historical levels.
Butter prices have also eased in the US, but this market is much more domestically focused. CME futures prices indicate there will be a seasonal lift in butter prices, as would typically happen leading into the holiday period. US butter production was up 6% in August, but it is still down 2% year to date. The volume in storage has continued to drop indicating demand is outstripping supply. There was 5% less butter in storage at the end of September than at the same time last year. Milk production has been weaker on the west coast, where many of the butter churns are located, which is keeping supply in check.
Intervention still shaking the market
The fall in skim milk powder (SMP) prices at the October 17 Global Dairy Trade (GDT) event means that Oceania SMP is relatively
aligned with prices being achieved in other regions. The US is currently the most expensive source, though its non-fat dry milk is only priced about US$25/t higher than SMP from Oceania.
The European Commission run intervention scheme for SMP continues to spook the market. There has been suggestions that product will not be bought at a fixed price next year (that is, the scheme will go straight to tender), or that the fixed price will be lower than usual. The scheme usually allows for 109,000t of SMP to be bought in at €1698/t
WMP Futures US$ Open Interest
Nov 2017 2975 6596
Dec 2017 2920 7084
Jan 2018 2900 5163
Feb 2018 2900 3760
Mar 2018 2880 2745
Apr 2018 2895 1195
SMP Futures
Nov 2017 1750 1820
Dec 2017 1730 1281
Jan 2018 1760 1090
Feb 2018 1750 681
Mar 2018 1750 619
Apr 2018 1775 95
AMF Futures
Nov 2017 6350 173
Dec 2017 6100 284
Jan 2018 6000 210
Feb 2018 5980 242
Mar 2018 5900 127
Apr 2018 5870 60
Butter Futures
Nov 2017 5250 552
Dec 2017 5200 465
Jan 2018 5150 300
Feb 2018 5150 166
Mar 2018 5150 68
Apr 2018 5100 26
DAIRY COMMODITY MARKETS US butter stocks falling SMP prices alignedhigh
lights
1000
3000
5000
7000
Nov 2017 Dec 2017 Jan 2018 Feb 2018 Mar 2018 Apr 2018US$ pe
r Ton
ne
Source: NZX Data
NZX Dairy Futures - forward price curves
WMP Futures SMP Futures AMF Futures Butter Futures
0
20000
40000
Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17
Tonn
es
Source: NZX Data
NZX Dairy Derivatives monthly trading volumes
WMP Futures SMP Futures AMF Futures WMP Options Butter Futures
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MONTHLY DAIRY OCTOBER 2017 PAGE 4
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(about US$2000/t) between 1 March and 30 September each year.
There is also still no indication yet of what is to happen to the SMP that has been stockpiled through the intervention scheme over the past two years. The Commission does continue to run monthly tenders. At the October 17 tender, there was 40t of SMP sold at €1441/t (US$1700/t), which was the maximum price offered. The prices offered have become increasingly more aggressive. This is the lowest price that the Commission has accepted for this product to date.
SMP prices are expected to move very little over the next few months. The NZX Dairy Derivatives market has the November SMP futures contract priced at US$1750/t, and expects SMP to fall to a low of US$1730/t in December and then see some recovery. The EEX and CME both have SMP futures priced at similarly low levels, but both also expect SMP prices to begin recovering earlier than the NZ market does.
WMP set to fall below US$3000/t?
WMP prices have been seen as relatively steady, despite the falls in WMP prices on GDT this month. However this may soon end, with the NZX Dairy Derivatives market suggesting that the drop in WMP prices will accelerate. The US$2975/t that the November WMP futures contract was at yesterday suggests a 3% fall is in store for WMP prices at the first November GDT event – though that is still around two weeks away. The Derivatives market expects WMP to ease to US$2880/t by March.
Demand from China for WMP has been steady. Import figures have been lifting against year-ago levels since June.
September imports rocketed up 242% to 24,641t, which follows an increase in August of 92%. In September there was a 242% lift in the volume of WMP China imported from NZ, but it also imported more WMP from Australia, the US and Europe. Year to date, China has imported 15% more WMP than it did last year, with 398,092t imported.
Chinese buyers will be currently importing to land product in January, whilst the lower tariff rate applies. The 2018 rate for milk powders from NZ is 0.8% up to a safeguard level of 154,745t.
The 2017 rate was 1.7% up to a safeguard level of 147,326t. Once the safeguard level is reached the standard tariff of 10% applies. From 2019, the tariff rate drops away to zero, but a safeguard does still apply until 2024.
China has apparently not bought all they need just yet, so there should still be some demand from this region for the next little while.
Other regions that typically buy WMP have been buying more hand-to-mouth. There
DAIRY COMMODITY MARKETS Intervention smp sold at €1441/t China WMP imports up 242% in
Septemberhighlights
0
1000
2000
3000
4000
5000
6000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecSource: AgriHQ
Whole milk powder prices - US$ per tonne
2014
2015
2016
2017
0
50
100
150
200
250
Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17
Thou
sand
Ton
nes
Source: GTIS
Whole milk powder exports (main exporting countries)
Argentina
Australia
United States
EU 28
New Zealand
0255075
100125150175200225
Jul 16 Oct 16 Jan 17 Apr 17 Jul 17
Thou
sand
Ton
nes
Source: Statistics NZ
New Zealand whole milk powder exportsOther
Africa
Middle East
China & Hong Kong
Asia (Excl China & HK)
Total Last Year
020406080100120140
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Thou
sand
Ton
nes
Source: China Customs
China whole milk powder imports
2015
2016
2017
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MONTHLY DAIRY OCTOBER 2017 PAGE 5
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0
1000
2000
3000
4000
5000
6000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecSource: AgriHQ
Skim milk powder prices - US$ per tonne
2014
2015
2016
2017
does seem to be expectations from buyers that they will be able to get hold of WMP when they need it, despite NZ milk production dropping back in the early part of the season. Fonterra has lifted its GDT offer volumes of WMP for the events through to early December, which will be helping to support this view.
One of the other unknowns in the WMP market is how much may come out of Latin America. Latin America did win the majority of the most recent tender from the Algerian government.
Milk production is now improving in this region against last year’s poor performance, and Latin America would typically export more WMP in this situation.
However this is yet to show in export figures. Year to date, Uruguay’s WMP exports are still 37% behind last year, driven by falls in volumes to Brazil and Algeria. It has exported 164% more WMP to Russia. Brazil is even further behind, with year to date volumes down 75% on last year. Venezuela still accounts for 98% of Brazil’s WMP exports, but the volume that Brazil has sent to Venezuela has dropped 75%, and there is very little being sent anywhere else.
Cheese remains steadfastCheese prices have been reasonably steady.
GDT prices have remained close to US$4100/t. European prices are about US$100/t above this, while the US remains the cheapest source for this commodity as well, at US$3700/t.
European cheese production was 1% behind year ago levels in August, and remains down 1% year to date as well. EU cheese exports are up 6.8% year to date, with jumps in volume to Japan, South Korea, and Chile. A little more has also gone to the US. There was very little cheese in storage in the EU at the end of August, so it’s likely cheese is now running a bit short in this region.
The situation is quite different in the US. Cheese production continues to grow, with 3% more produced year to date. At the end of August, there was 6% more cheese in storage than at the same time last year, though the current volume is down a little from the record that was reached in July.
There is a belief within the US that any extra cheese produced can simply be exported when necessary, particularly because the US is the cheapest source for this commodity at present. Processors have also been happy to sit on cheese stocks until they are able to sell them.
So there is very little concern about the volume of cheese that is in storage and processors are happy to keep producing more. Prices have therefore remained steady in this market and are not expected to shift much.
US cheese exports have lifted 23% year to date. Larger volumes have gone to Mexico, South Korea, Japan and Australia.
DAIRY COMMODITY MARKETS
South America exports still well behind
US keeps making more cheesehighlights
0255075100125150175200
Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17
Thousand Tonnes
Source: GTIS
Skim milk powder exports (main exporting countries)
Argentina
Australia
United States
EU 28
New Zealand
010203040506070
Aug 16 Nov 16 Feb 17 May 17 Aug 17
Thou
sand
Ton
nes
Source: Statistics NZ
New Zealand skim milk powder exportsOther
Africa
Middle East
China & Hong Kong
Asia (Excl China & HK)
Total Last Year
0
100
200
300
400
500
Sep 15 Mar 16 Sep 16 Mar 17 Sep 17
Thou
sand
Ton
nes
Sources: USDA, EC
Skim milk powder in storage
EU Private
EU Public
US
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MONTHLY DAIRY OCTOBER 2017 PAGE 6
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2000
3000
4000
5000
6000
7000
8000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecSource: AgriHQ
Butter & anhydrous milkfat prices - US$ per tonne
Butter 2016
Butter 2017
AMF 2016
AMF 2017
Japan is one of the world’s largest importers of cheese, usually only surpassed by the United Kingdom. While US exports of cheese to Japan are up 22% year to date, this seems to be a recent jump, as Japan’s import figures show that cheese imports from the US are down 4.8% year to date (both sets of figures to August). Its imports from Australia – which normally supplies about a third of Japan’s cheese imports – have also fallen, by 4.4%. However Japan has imported a little more cheese from New Zealand (+0.5%) and from Europe (+19%).
Whey follows cheese but lactose weaker
Whey prices have also remained fairly steady. US whey has been priced at just over US$900/t since mid-September. The CME market does expect US whey to decline, however, with the nearest dated contract for whey at US$860/t – unsurprising given the volume of cheese the US is producing. European whey prices have come back by about US$100/t since mid-September and are currently averaging US$789/t.
Lactose is struggling more than whey as competition has become more aggressive. Prices for lactose have not been published at the last two GDT events as what was sold went at the starting price. At the end of September, lactose was trading at US$759/t on GDT. Processors are finding that prices are now closer to US$500/t. US lactose prices have fallen to US$579/t, from US$650/t in mid-September. GDT’s new multi-seller lactose pool is due to start at the December 5 event, which should help to provide more price transparency for this commodity.
DAIRY COMMODITY MARKETS
US exports more cheese to Japan Lactose prices fallinghighlights
05
101520253035
Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17
Thou
sand
Ton
nes
Source: GTIS
Anhydrous milkfat exports (main exporting countries)
Argentina
Australia
United States
EU 28
New Zealand
0
10
20
30
40
50
Aug 16 Nov 16 Feb 17 May 17 Aug 17
Thousand Tonnes
Source: GTIS
Butter exports (main exporting countries)
Argentina
Australia
United States
EU 28
New Zealand
020406080100120140160
Aug 15 Feb 16 Aug 16 Feb 17 Aug 17
Tthousand Tonnes
Sources: USDA, EC
Butter in storage
EU Private
US
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MONTHLY DAIRY OCTOBER 2017 PAGE 7
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-1000
-500
0
500
1000
1500
2000
Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17Th
ousand
Ton
nes
Year on year change: key exporting regions
Total
NZ
Australia
US
EU
Sources: DCANZ, Dairy Australia, USDA, Eurostat,
European milk continues to be the key focus of dairy markets, as production is now starting to accelerate. August production was up a sizeable 3.1% with further increases through the remainder of the year expected – with growth likely to persist through to Europe’s peak in May.
Southern Hemisphere production is usually of most importance at this time year, particularly as NZ is going through its peak production months. However the commodities market does not seem to be taking a lot of notice of the figures that are coming out. NZ tracked behind last year in August and September, driven by ongoing wet conditions.
Fonterra was down 2.1% in September and total NZ milk intakes were down 1.3%. Australian production is looking better – up 1.6% season to date – though August was flat on last year. The latter half of 2016 was weak for Australia compared to 2015 levels, so while milk production is now showing an increase against year-ago levels, it is not back to more average levels yet.
South American production is looking considerably more positive. Brazil is up 4% year to date (to June) while Uruguay is up 8% year to date (to August). Argentina is still tracking 7% behind last year however (year to September). Like Australia, the Brazil and Uruguay figures are against low levels recorded in 2016, but it does bode well for improved milk supply from the region.
Meanwhile growth in milk has slowed in the US, but growth of nearly 2% is still expected for the full year. American farmers seem to be happy to continue to produce more.
EU milk acceleratingEuropean milk grew 3.1% in August,
making for six consecutive months of increases. This brings Europe to +0.2% year to date. The European Commission has been forecasting 0.6% growth for Europe this year, which is now looking quite achievable. Production in Germany and France finally turned around in August. German production was up 0.9%, while French production was up 0.6%. This is the first month in which both countries have posted an increase this year. Production was down 1.7% in the Netherlands. Mid-size producers have also continued to increase their milk supply, including Poland (+5.1%), Italy (+13.2%) and Ireland (+11.2%).
Growth is expected to continue to accelerate particularly during the later months of this year. A year ago European
MILK PRODUCTION - GLOBAL AND EUROPE NZ production trailing behind Uruguay production up 8% year
to datehighlights
Europe the focus of global milk supply
farmers were being subsidised to cut production so growth rates will look very favourable when compared to year ago figures. European milk prices do support continued growth. The average EU price is estimated at €35.82/100kg of milk for September. This compares to a price of €27.81/100kg of milk in September 2016.
FrieslandCampina’s guaranteed price for October is €41.75/100kg. The company has recently called on Dutch farmers not to produce more phosphate than is covered by the phosphate rights of each dairy farm and to spread milk supply throughout the year as much as possible. A survey run by
the company in August suggested that the number of phosphate rights that farmers aspire to take over is much higher than what is actually available, and that they intend to increase the number of milk producing cows. FrieslandCampina says it has sufficient processing capacity to process all the milk it is supplied, assuming members stay at or below the statutory level of the phosphate rights system. It appears that Dutch farmers will need to wind their milking cow numbers back further to remain within their phosphate limits. The new phosphate rights system for dairy cattle in the Netherlands starts from 1 January 2018.
10000
11000
12000
13000
14000
15000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Thousand Tonnes
Source: Eurostat, AgriHQ
EU milk production -monthly
2015
2016
2017
-1000
-500
0
500
1000
1500
Feb 16 Aug 16 Feb 17 Aug 17
Thou
sand
Ton
nes
EU Year on year change in milk production
Ireland
Poland
UK
Netherlands
France
Germany
EU
Source: Eurostat
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MONTHLY DAIRY OCTOBER 2017 PAGE 8
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US sees slower growth in September
Growth in US milk production slowed in September. September output was up just 1.1% year on year, which follows growth closer to 2% in July and August. Milk production dropped sharply in California –down 3.4% – and production was not strong enough in other large milk producing states to outweigh this drop. Wisconsin was up just 0.8% and Idaho grew 0.2%. Milk was down 0.4% in New York.
Late September was hot, which affected milk per cow. Milk yields were up just 0.3%. Feed quality is also becoming an issue. Weather has been affecting harvest progress for both wheat and corn. In USDA reports, quality of corn has held up, although it has been slower to mature than usual. Quality of spring wheat has been poor for most of the harvest period, however.
While September was weaker than expected, the USDA has raised its forecast for 2017 milk production from +1.7% to +1.8%. Milk per cow is expected to improve, although cow numbers are forecast to be a little lower. Production is expected to grow another 1.9% in 2018.
Year to date, production is up 1.5% for 2017. US milk would need to grow at 1.8% over the remaining quarter of the year to reach the full year forecast.
US milk prices have slipped a little, which will be putting a bit more pressure on margins. However they are still at reasonable levels, and the price of feed remains comparatively cheap, so this is unlikely to have too much of an effect on output.
Slow recovery for Australian milk
Australia’s milk supply is slowly starting to recover, as reasonable weather and good input costs support higher milk prices this season. August production was flat against last year, bringing total season production to an increase of 1.6%.
The increases for the season so far do compare against a relatively low base, as production had dropped considerably at this time last year. August 2016 production was down 9.1% on August 2015 and July 2016 production was down 10.1%. So while production for the 2017-18 season is up against last year, it remains well behind 2015 levels.
Winter was one of the driest on record for the country. This was felt more in the west of the country, and has resulted in estimates of lower crop production this season. This saw grain prices rally, though they remain slightly behind historical levels. Water storage levels
MILK PRODUCTION – UNITED STATES AND AUSTRALIA high
lights
are still reasonably good, but some systems are starting to track behind last year.
Dairy Australia continues to forecast growth of between 2 and 3% for Australia this season. It expects growth to come more from southern regions, which tend to be more export focused. Those in domestic focused regions have been impacted more by weather and have had more of
a squeeze on profitability. There are risks to the anticipated growth this season. Confidence is still low for many Australian farmers, particularly because the fate of Murray Goulburn still hangs in the balance. Cashflows remain tight due to last season’s low milk price. There is a smaller herd, and there is potential for weather to impact farms and input costs to rise.
California production drops again
Australian growth to come from southern regions
60006400680072007600800084008800
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Thou
sand
Ton
nes
Source: USDA
US milk production -monthly
2015
2016
2017
101112131415161718
Jun 15
Aug 15
Oct 15
Dec 15
Feb 16
Apr 1
6Jun 16
Aug 16
Oct 16
Dec 16
Feb 17
Apr 1
7Jun 17
Aug 17
Oct 17
Dec 17
Feb 18
Apr 1
8
Source: AgriHQ
US farmgate milk prices
Class III
Class IV
500600700800900
100011001200
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Thou
sand
Ton
nes
Source: Dairy Australia
Australian milk production -monthly
2015
2016
2017
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MONTHLY DAIRY OCTOBER 2017 PAGE 9
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Milk production behind during peak
1.3% behind year-ago levels. We have now experienced three seasons in a row where milk intakes during September have been below par. Milk intakes during September and October this year are expected to be the lowest recorded since 2012.
The AgriHQ milk production forecast for the 2017-18 season (12 months to 31 May 2018) has been revised down further. We now expect no growth in milk supply this season. Our previous forecast was growth of 1.5%.
Milk production is expected to be down on last year during the peak production month of October.
This is significant as it is the largest milk producing month of the season. Milk production lost during the spring is typically difficult to catch up later in the season, but not impossible, as proven in the 2016-17 season.
Milk intakes in June and July were up on last season but winter milk volumes are insignificant. Spring milk intakes (August to October) are estimated to be down 1% across the three months.
Milk production during the summer months is expected to benefit from the high soil moisture levels which still persist across NZ.
But the final three months of the milk production season – March to May – are expected to be weaker than last season. The autumn of 2017 was exceptional due to fantastic conditions for pasture production. It is highly unlikely that these conditions will be repeated again in 2018.
The wetter west coast regions of New Zealand are only just starting to recover from the excess rain which fell persistently from late July through to early October.
Most areas have received below normal rainfall over the past fortnight which has allowed excess moisture to drain away. Most dairying regions have still received somewhere between 50mm and 150mm of rain in October.
This means soils are still wetter than normal in the main dairy regions.
During the very wet period farmers used what options they had available to them to offset the poor pasture production but it was a bit like ‘swimming against the tide’ on many farms.
Supplementary feed has been brought in to offset the slow pasture growth but many farms don’t have the facilities or finances for supplementary feed to make up a large portion of the cows diet.
As a result of the short-term demand from the dairy industry the supplementary feed market is now quite tight. Demand for
MILK PRODUCTION – NEW ZEALANDAgriHQ now forecasting no growth
highlights
most feed types has been strong with dairy farmers keen to get their hands on anything that can be delivered immediately. However there is still a reluctance from dairy farmers to lock into forward contracts for grain which is currently being planted.
Price expectations tend to differ between growers and buyers. Growers are hoping that higher farmgate milk prices will mean more spending from dairy farmers.
But dairy farmers remain cautious as the financial bruising they received during the dairy downturn is still fresh in their minds.
Caution is warranted given the outlook for this season’s milk price is not quite as rosy as it looked a couple of months ago.
Any rain that falls from November onwards will generally be welcomed by farmers as this will bolster soil moisture levels before we move into the dry summer period.
This is particularly the case on the drier east coast regions and the hotter northern regions.
The traditional west coast dairying regions typically receive good levels of rainfall all year round.
October expected to be worst in five years
0500
100015002000250030003500
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Thou
sand
Ton
nes
Source: DCANZ
NZ monthly milk production
2015
2016
2017
0.0
0.2
0.4
0.6
0.8
1.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: NZX Data
NZX Pasture Growth Index
10-yr Ave 2015 2016 2017 Forecast
0
10
20
30
40
50
60
Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
thou
sand
hea
d
Source: NZX Data
NZ weekly cow kill includes dairy and beef cows
5yr average
2015-16
2016-17
2017-18
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MONTHLY DAIRY OCTOBER 2017 PAGE 10
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MILK PRICE – NEW ZEALANDSeptember 2018 milk price futures $6.40/kg MS
highlights
Milk price predictors
Milk Price Futures
2017-18% change f rom spot price
NZD/USD EXCHANGE RATE
0.620 0.670 0.720 0.770 0.820
USD per tonne FOB
2590 -24% 5.80 5.20 4.70 4.25 3.85
2780 -19% 6.40 5.75 5.20 4.75 4.30
2990 -13% 7.00 6.35 5.75 5.25 4.80
3217 -6% 7.70 7.00 6.36 5.80 5.30
3440 0% 8.40 7.60 6.95 6.35 5.85
3680 7% 9.10 8.30 7.55 6.95 6.40
3940 15% 9.90 9.00 8.25 7.55 7.00
2018-19% change f rom spot price
NZD/USD EXCHANGE RATE
0.620 0.670 0.720 0.770 0.820
USD per tonne FOB
2190 -36% 4.60 4.10 3.65 3.30 2.95
2430 -29% 5.30 4.75 4.30 3.85 3.50
2700 -21% 6.15 5.50 5.00 4.55 4.10
3000 -12% 7.05 6.35 5.80 5.25 4.80
3300 -4% 7.95 7.20 6.55 6.00 5.50
3630 6% 8.95 8.15 7.45 6.80 6.25
3990 17% 10.05 9.15 8.35 7.70 7.10
2019-20
Outlook for WMP deteriorating
Contract Price
($/kgMS)
Open
Interest
(lots)
Sep-18 (2017-18 season) 6.40 3994Sep-19 (2018-19 season) 6.25 10Sep-20 (2019-20 season) 6.35 0
Note: 1 lot 6,000kg MS
% change f rom spot price
NZD/USD EXCHANGE RATE
0.610 0.660 0.710 0.760 0.810
USD per tonne FOB
2260 -34% 4.80 4.30 3.85 3.45 3.10
2510 -27% 5.55 5.00 4.50 4.05 3.70
2790 -19% 6.40 5.75 5.20 4.75 4.35
3100 -9% 7.35 6.65 6.15 5.50 5.05
3410 0% 8.30 7.50 6.85 6.25 5.75
3750 10% 9.35 8.50 7.75 7.10 6.55
4130 21% 10.50 9.55 8.75 8.05 7.40
AgriHQ forecast drops to $6.36/kg MS
The AgriHQ farmgate milk price forecast for the 2017-18 season is currently 39 cents behind Fonterra’s forecast, which remains at $6.75/kg of milksolids (MS).
The current AgriHQ forecast of $6.36/kg MS is down 9c from where it was a month ago, though our forecast had lifted to $6.60/kg MS in early October before dropping away again.
The outlook for commodity prices has fallen right away recently, following two weak results at GDT.
Regular grade WMP to ship in December did actually manage to lift 1.5% at the October 17 GDT event, despite a 0.5% fall in the overall WMP price index.
However, WMP futures prices have been weakening over the last few weeks, and have weakened even further since the last GDT event. The November WMP futures contract settled at US$2975/t yesterday, and has traded down to US$2950/t this morning. This contract was priced at US$3170/t a month ago.
The Derivatives market expects WMP to fall to around US$2900/t by early next year. If this is realised in the physical market, milk price forecasts will certainly be under pressure from current levels.
Outlooks for other dairy commodities have also weakened. While butter, AMF and SMP are less key to NZ milk prices than WMP, weaker prices for these commodities will also be negatively impacting milk price forecasts.
Processors have maintained their forecasts for now. However if commodity prices do not improve, downwards revisions will become more likely.
The NZD:USD exchange rate has depreciated, following the announcement of a Labour-NZ First-Greens coalition government for the next term. The spot exchange rate is currently NZ$0.6875 to the US dollar. While Fonterra has already hedged much of its currency needs for the 2017-18 season, this lower rate is promising for any product yet to be hedged.
The AgriHQ forecast for the 2018-19 season has also fallen right away. This forecast has fallen 40c to $5.80/kg MS, also on a weaker outlook for commodity prices.
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
3
4
5
6
7
8
Jun 17 Aug 17 Oct 17
Ope
n Interest ('oo
o lots)
1 lot =
6,000
kg M
S
Milk pric
e ($/kg MS)
Source: AgriHQ
NZX Milk Price Futures
Open interest (Sep18) Open interest (Sep19)Sep-18 Sep-19
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MONTHLY DAIRY OCTOBER 2017 PAGE 11
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MILK PRICE – NEW ZEALAND
AgriHQ 2018-19 forecast $5.80/kg MS
Exchange rates providing supporthighlights
Foreign exchange rate forecasts
Farmgate milk price forecast $/kg MS 2016-17 2017-18
Fonterra (plus 40c dividend) 6.12 6.75Westland Milk Products 5.18 6.40-6.80Open Country Dairy 6-6.10 6.25 - 6.55Tatua 7.10Synlait 6.16 6.50Oceania (Fonterra + 17c for 2017-18) 6.22 6.92Miraka 5.80-6.00*
*plus premium of up to 20c/kgMS
Milk prices reported in the table are indicative only and may not apply to all suppliers. Prices can not be directly compared between companies due to differing supply terms such as requirements for shareholdings, and differing terms and/or payment schedules.
Milk production in most regions is expected to continue to grow through at least the early part of next year, which will keep the pressure on commodity prices.
Even if milk production comes back in the second half of 2018 – the beginning of the 2018-19 season – it will take time for commodity prices to recover.
While $5.80/kg MS is lower than forecasts for the 2017-18 season, it is still above the average breakeven point for the average NZ farmer.
Bank forecasts for exchange rates are relatively flat through to 2019, though they have weakened slightly over the past month. The exchange rate taken into account in the AgriHQ forecast is 1c lower than last month, which is providing some support.
The September 2018 milk price futures contract has declined 34c over the past month, settling at $6.40/kg MS yesterday. This contract has steadily lost value following the weak GDT results this month. There are currently 3994 open positions in this contract, equivalent to 24 million kg MS.
The September 2019 milk price futures contract remains at $6.25/kg MS, having yet to trade any further. The spread between the highest bid and the lowest offer is currently 50 cents – it’s unlikely the contract will trade any further until this gap narrows.
The AgriHQ forecast for the 2019-20 season has fallen 20c to $6.15/kg MS. Commodity prices appear unlikely to improve much by this time, though they are expected to improve slightly on the 2018-19 season. Exchange rates are also expected to depreciate a little further, providing some support to this forecast.
7.59 4.72 6.10 7.60 6.08 5.84 8.40 4.40 3.90 6.12 6.75
0.07
0.480.27
0.30
0.32 0.32
0.10
0.25 0.25
0.400.45
2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18*
Source: Fonterra
Fonterra Milk Price ($/kg MS) and Dividend (per share)
Milk Price Dividend
0.60
0.65
0.70
0.75
0.80
Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17
NZD:USD
0.68 0.69 0.7 0.71 0.72 0.73
NZD:USD
Q4 17 Q1 18 Q2 18 Q3 18 2018
1.16 1.18 1.2 1.22
EUR:USD
Q4 17 Q1 18 Q2 18 Q3 18 2018
0.53 0.55 0.57 0.59 0.61
NZD: EUR
Q4 17 Q1 18 Q2 18 Q3 18 2018
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MONTHLY DAIRY OCTOBER 2017 PAGE 12
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DAIRY COMPANY - SHARE PRICES
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This
month
Change Last
month
3 months
ago
Last year
NZZX Fonterra (FCG) 6.23 6.15 5.99 5.91
NZSX Fonterra Shareholders' Fund (FSF) 6.23 6.20 5.99 5.90
Synlait Milk 7.98 5.53 4.25 3.25
The a2 Milk Company 8.42 6.17 4.04 1.98
PGG Wrightson 0.57 0.57 0.59 0.48
Allied Farmers 0.09 0.08 0.09 0.06
NZAX LIC 2.30 2.40 2.40 2.65
Share prices
Source: NZX
Dairy Stock Prices
DeliveryNorthern North
IslandSouthern North
IslandNorthern South
IslandSouthern South
IslandNew Zealand
RangeNew Zealand
Average
Dairy cows
High BW herd June 1st 1950-2100 1800-2300 1400-2000 1800-2400 1400-2400 1905
Low BW herd June 1st 1650-1850 1400-1750 1420-1880 1300-1800 1300-1880 1665
Budget cows June 1st 800-1000 900-1200 950-1400 900-1400 800-1400 1100
In Milk Cows Immediate 1500-1700 1200-1700 1350-1900 1200-2000 1350-1900 1550
Carry over cows June 1st 1400-1500 1450-1800 1100-1500 800-1100 800-1800 1315
Young stockIn calf R2 heifers May 1st 1500-1750 1300-1900 1550-1800 1500-1900 1300-1900 1645
R1 heifers Immediate 850-1000 700-1000 675-1050 800-900 750-1200 940
→
→→
→→
→
LIC, PGW both improve profitability
LIC released its annual results this month. It has lifted its profitability this year, with earnings before interest and tax up $6 million to $8.1 million. Revenue was down for the 2017 financial year; however a focus on minimising costs appears to have paid off. LIC intends to continue to work to minimise operating costs so that it can weather future challenges. LIC’s share price is 10c lower than it was at this time last month, however, at $2.30.
PGG Wrightson (PGW) released its annual results in late September. Net profit after tax was up 6% to $46.3 million. The company did say that the severe weather NZ has experi-enced, including the two cyclones in April, impacted its final quarter earnings, along with other market conditions. PGW has also appointed a new CEO, Ian Glasson, effective from 1 November 2017. Mr Glasson has experience in agribusiness and branded food sectors across several international markets.
The a2 Milk Company’s (ATM) share price continues to rocket up. It reached $8.42 yesterday, up another $1.89 since this time last month. Synlait (SML) has seen similarly stellar results, with its share price having lifted $2.12 over the past month, reaching $7.98 yesterday. The cooperation between the two companies is paying off for both of them. Both companies have initiatives in place that will help them continue to grow over the next year, including new sites for SML and registration with the Chinese authorities to allow ATM to continue to sell its infant formula into this market.
Fonterra shares – both Fonterra Cooperative Group (FCG) and Fonterra Shareholder’s Fund shares – remain at about the same level as they were at this time last month. Both FCG and FSF shares are currently priced at $6.23. Prices did drop to $6.10 in early October but have steadily recovered since then.
↔
0
0.5
1
1.5
2
2.5
5.405.605.806.006.206.406.60
Oct 16 Jan 17 Apr 17 Jul 17 Oct 17
Milli
ons
Source: NZX
Fonterra Shareholder Fund last traded price & daily trading volumes
Volumes Price
0
10
20
30
40
50
0
30
60
90
120
Oct 15 Apr 16 Oct 16 Apr 17 Oct 17
Land Price
Number of Farm Sales
Source: REINZ
New Zealand Dairy Land Sales
Sales Volume (previous 3 mths) Land Price $/kgMS