Today's GDT full dairy auction was a mixed affair. Although prices slipped -1.4% overall in USD terms they actually rose +0.6% in NZD terms as the NZD has re-rated lower over the past few weeks.
The important milk powders fell, with SMP down -2.2% from the last full auction and WMP was down -2.1% on the same basis.
But the last full auction was on December 17, and there have been two GDP Pulse events since then and both of those reported lower prices. So from the last GDT Pulse event WMP prices actually ticked up slightly.
Meanwhile the products based on milk fats, like butter and cheese, all rose. Butter was up +2.6%, Cheddar was up +1.0% and Mozzarella was up +3.6% at this auction from the prior one. (These products are not offered at the Pulse events.)
In the background, regions like the US and China are delivering lower milk volumes in their dairy industry. While almost all their output is for domestic consumption, lower milk volumes there mean there is less competition in export markets. Of special note is that American cheese production is down more than -6% from this time last year. That is a shift that market traders will have noticed.
Into North Asian markets (China, Korea, Japan) that general region took almost a third of all product at today's auction. And about the same share was taken by South East Asia market customers. Demand from the rest of the world was relatively light (Middle East 16%, Europe 7%, and South America 6%).
Today's prices achieved, while lower than at the last event, were not as low as the futures market was expecting for the milk powders who had been watching the Pulse trend. So there will likely be something of surprise reckoning in the futures trade.
For dairy farmers, the upshot will be that the recent strong farmgate payout forecasts will probably be sustained. And don't forget these are in NZD, whereas product market pricing is in USD, so payout forecasts are underpinned by the depreciating currency. Fonterra's mid-point indication currently leads the private analyst forecasts, so perhaps some of those private analysts will dust off their estimates and bring them up to the Fonterra level now.
As we start 2025, there does seem to be upside potential here. Meanwhile, milk production volumes are rising locally, and from an export point-of-view we seem to be in a virtuous phase. The lower NZD, plus the holding demand, plus the rising prices, plus the lower global competition all are lining up well for the dairy sector.
Dairy might be leading an export recovery for the economy. The lower NZD could have the same impact for other sectors like horticulture, seafood, logs, and meat as well. It may well be that the rural sector is the engine that will turn our stuttering economy around.
The big unknown at present is how the impending US tariff blitz will affect world trade and the targeted economies. Although those tariff actions are likely to ignore New Zealand, they won't be ignoring our largest customers.
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It may be worth considering that milk production in NZ has effectively been flat for a decade.
https://www.clal.it/en/index.php?section=consegne_new_zealand
The million people we've imported come from countries where the population have (up to) a 90% lactose intolerance
https://en.wikipedia.org/wiki/Lactose_intolerance#:~:text=Worldwide%2C%….
As the number of people with European genes decline, and the number of people with Asian genes increase, the dairy industry will decline no matter what it does. I wouldnt be staking NZ's future on it.
When people get wealthier, they gravitate towards more animal protein. Dairy consumption is still increasing in Asia. KW assumes a higher propensity for lactose intolerance means people won't eat dairy, which is about as accurate as assuming if food has a 1 star health rating that people won't lap it up.
Plus, many who believe they are lactose intolerant are actually intolerant to the A1 protein. Hence A2 milk's success in China, based partly on advertising reduced digestive discomfort (which is just about the only benefit of A2 that has been well studied at this point).
Perhaps Winston First should keep an eye on NZ effectively banning Russian fertliser by imposing a 40% tariff on any Russian fertilser imported into NZ. The US has no such additional tariffs on Russian fertiliser. There has been no change to the US tariffs which were in place before the Russo-Ukraine war.
Reducing input costs to farmers is a must in the overall economic equation, and fertiliser is one of them.
There has been comment on here that NZ is now using about all the land suitable for dairying. If that is the case and if in quitting a lot of it’s branded products, Fonterra is meaning to apply itself to the commodity/bulk end of production instead, then surely a question arises as to how export earnings are then to climb in terms of value. In other words it’s all very well to flat out produce as cost effectively as possible but if the requisite raw material is not, and cannot increase, then the value of the product simply flat lines relative to market trends.
That would probably involve moving from pastured cows to feedlots. Grass fed dairy commands higher prices, and is gaining in popularity overseas (eg. Australian company BUBs infant formula sold in the USA is marketed as grass fed). Not sure if any NZ company is capitalising on the trend though.
If we want to look at value-add on our milk we should be aiming to convert the entire herd to A2 and putting money into research showing its benefits (or rather, the danger of milk containing A1 which is heavily suggested epidemiologically).
20 years ago would have been best, but committing today would be a good start.
Thats because it is still dealing with its Chinese market problem. Which is a warning to other companies reliant on that market (like A2). They have done well to build a business in the US though, and hopefully that will pay off for them in the future. BUBs is showing what might have been possible for NZ IF companies in the US if only Jacinda Ardern had secured a trade deal for A2 and Fonterra when she met with Biden during the US infant formula crisis.
Thats because it is still dealing with its Chinese market problem.
No it's not. People seem to think Chinese consumers are willing to pay any price. They won't.
The problem with BUBs is that they can't produce their product that enables ROI and ROE (effort). Production costs and costs to serve are too high.
Well in the context of that might be an answer to my question in that NZ’s production is being restricted by further processing which both slows and lessens throughput, for want of a better word. It’s an interesting factor to balance, between processing efficiencies versus market returns. But nonetheless, output of less sophisticated products may well result in NZ’s position on that graph improving and that could well be what Fonterra’s aim is.
David
NZ's cow production is lower as its production system is based on an "all grass production system" more or less which means we cant fully feed our cows and they also have to waste energy walking to their feed (4-8km/day). The other countries in your graph dont have NZ's climate where grass is grown all year round (but we dont have the cereal crops that others have) and so they must use crops and a "cut & cart production system" as well as a housed cow system as their climate is either hotter or colder than NZ's.
NZ's production system is cheaper and simplier to run but due to our geographic location to our markets invariably can be more costly than our competition.
A lot of cows in the USA and Europe are now milked by robots where in NZ we cant afford to go down this path.
NZ is the biggest exporter of dairy products in the world whereas most of the countries above only produce enough to satisfy their own populations needs, and thus in a good season may have surplus product which they will sell off to the highest bidder - the USA has had a bad season this year which is why NZ's dairy payout is up (as well as our beef prices).
From my experience NZ farmers suffer from a lack of economies of scale - our farms (country) are to small to compete and we pay far to much for our farm inputs when compared to the rest of the worlds major farming nations. We are also over governed with far too much compliance cost to deal with and again these costs scuttle any economies of scale.
You need to look at farm systems and animal breeds as well.
USA has giant Holsteins in factory environments - so will produce more volume.... but the cost of that volume??
I think we are the most efficient producers in terms of inputs and volumes.
Talk to someone in the industry for info. Maybe DairyNZ??
No doubts correct for almost any milk producing nation.
But the real question is the costs associated with that production. Locally the most common way of increasing production is the use of maize silage. Great in high payout years, very depressing in low payout years. There is no doubts the national herd is capable of producing more per cow.
So while high production per cow may appear good for total export volumes, it's also possible to bankrupt the initial producer.
Having said that. There is still room for improvement even on the grass only farms. Within our immediate district there is a disturbing number of farms bumbling along at 300kgs/cow or even less and we'll less than 1000kgs/ha. All would improve with simple application of consistent grazing management. Not as simple as you'd think to find competent managers of grass let alone excellent ones.
Is the industry to blame?
Years back dairy farming provided a pretty clean pathway re contract milking, share milking and farm ownership.
Seems to me the owners have pulled up the ladder, many relying on imported labour and the larger farms becoming corporates.
Could this be a reason we don't have the excellence needed?
One would consider that our dairy industry has been seeking to improve productivity (per cow) the past decade so the expectation that we suddenly discover a major productivity gain in the near term would appear hopium. As far as I can see we have increased average herd sizes, we have increased inputs (PKE for FX) and we have effectively reached (exceeded) environmental limits....TAs are now having to deal with nitrate leaching to their water supply....that will impact input costs one way or another.
We appear unlikely to be able to increase productivity or volume.
Our whole ag sector is being priced out of competiveness across the board....too many inputs are sourced offshore.
It's quite scary how much we rely on bovine milk products to underwrite our economy, but it is what it is. Someone told me many years ago that only 10% of working age people in NZ actually create our wealth [from outside our borders] while most of the other 90% pretend to be adding value. But most of them don't.
As much we like to think we are smarter than that, here we are 40 years later still relying on milk & its many by-products for most of our income. Anything else that's any good disappears offshore real quick. Think Xero, think Dr Sean Simpson's recycling of industrial gases & Wrightson's seed business some years ago now.
In saying that, I'd like to see the Fonterra brands sale stay mostly within New Zealand but that could be wishful thinking.
Perhaps a key area of focus to boost and diversify the economy should be to ensure NZ is more attractive to capital then. Specifically to fuel business investment. Inevitably this would require both making the place more attractive to capital, and fixing the distortions caused by tax and planning on the housing market.
They should have IPO'd on the NZX, left NZ Kiwisaver funds as bagholders, and the founders would have gotten a knighthood.
My Food Bag is something for all Kiwi entrepreneurs to aspire to LOL. Although it would be a close tie with Peter Jacksons sale of Weta Digital to Unity, who then turned around and sacked every one of its NZ workers.
Is creating our wealth [from outside our borders] as important as we think it is?
I'd be interested in proper stats, but my casual observation is:
- We are richer by most measures than many countries that export much more than us.
- China makes almost everything these days, they aren't rich.
- We have a higher GDP per capita than Japan.
- The US could completely close their borders and still be rich.
I am not a farmer and have no farming connections. I do however have some grasp of numbers and have just done a short report on the NZ Economy for a group. Most of these numbers don't look good, whether it's our sustained trade deficit, our external debt, government borrowing, infrastructure deficit or our poor productivity record. We live beyond our means have done so for quite some time.
The total value of our primary sector exports are forecast to reach almost $57bn in the years to June, up from $53bn in the previous year. We absolutely need that income, so it behoves those who say we must abandon the way we farm to explain just what this would mean for our healthcare, social services etc. They never do and in my view, that's just dishonest. Several names come to mind.
You remind, admittedly a slightly different arena, of a recent statement by a clearly frustrated Mayor of Christchurch something like - I have councillors elected here who just think that money falls out of the sky. NZ is a mercantile nation, small and positioned disadvantageously at the south east end of the line, and it needs to produce goods to sell. To produce, it needs to import essentials it simply does not have itself. Iron, bauxite, copper, nickel, cotton, oil/petroleum, machinery and on and on. All that has to be paid for and the money to pay has to be earned. It’s hardly a complicated equation.
On the contrary, I suggest its dishonest to suggest we can continue farming as we do. For example Remilk: Real Dairy. No Cows.
rastus,
Perhaps you are right, but how certain are you that this will decimate the current market? Just a few years ago, artificial meat was going to displace real meat and that hasn't transpired. For example, the share price of Beyond Meat has fallen by 95% from its high in 2020. Here, Sunfed chicken has gone out of business.
Certain. I'd say inevitable, likely by decimating due to price differential.
NZ uses a cow to convert grass and water to milk. Its a matter of replicating the digestive system. A a matter of time before they crack it (one could argue they already have) and bring an identical product to scale.
A product here already but needs to be done better - margarine. The we have all the new milks - oat, soy etc.
But I'm talking an indistinguishable 'dairy' product as the real game changer.
Linklater, it's not just about the way we farm. It is more to do with the capability of our land . I would suggest we are already at the extreme end of production on most hill country. There is some room to move in pockets of land as far as horticulture goes but that's it.
And I have already mentioned in other comments that as far as I can see dairying is pretty much full on.
I reckon the only way the NZ Dairy Industry can increase its production now is by going to a "housed cow/cut & cart production system" which would allow farms to produce more drymatter per ha (15 to 25 tons DM/ha) via cropping e.g. maize and annuals, which in turn would mean cows would be fully fed and produce probably 50% more plus production per ha would also increase 50-100%.
This system would lower environmental issues as well as animal health problems, provided proper management and infrastructure is built.
However, this is a capital intensive system and in NZ's case because we export 90% of our dairy production we have an extremely cyclical payout which means we are limited to spending as little as possible on our production systems so that we can survive the times of low payouts.
In countries like Europe they have incentivised the dairy industry to house cows (500 plus cows) and process the effluent through biodigestors that converts the effluent into natural gas which is then used to produce electricity which is pushed back into the national grid. This off course requires the cows to be housed in purpose built barns which are set up with proper bedding and flooring as well as robotic milkers where the cow can be milked as often as she likes (3-4 times a day (which is much better on the cows udder health) compared to NZ's 1-2 times a day).
The farms Ive visited in Europe had as good as or better animal health as our top farms in NZ, production was very high compared to NZ and staff were all living locally in villages being part of a bigger community rather than the isolated community of a big dairy farm in the middle of nowhere where they cup up cows for 3-6 hours a day in NZ (maybe this is why we see meth taking over the rural communities in NZ etc etc).
The key issue in NZ is a lack of capital and the roller coaster nature of the dairy payout and grass based production in NZ where we are totally reliant on the cyclical world market instead of the local domestic market - its a hard industry to make a decent return on capital and its very hard on people, hence why most farmers kids dont end up in the industry.
Regarding NZ, I think the key is what industries are we going to build that can add to the NZ's offshore export income - dairy/trees/beef/oil/gas were John Keys answer to our problem but these options arent on the table now so what is going to be our "golden handshake"??? A couple of new gold mines arent going to be enough to get us out of the hole we are in! Maybe our only option is to become the seventh state of Australia..................and share their wealth!
So we house cows and increase inputs to European standards with the resulting increase in costs to their standard or more. But we maintain our distance to market disadvantage but are still competitive?
Keith Woodford write some interesting composting barn article's on Interest some time ago. That I can see the logic but not a full system shift giving away one of our few advantages, low cost.
What about other methods to best optimise our geographic/climate types as well as reducing waste and inefficiency, such as oad, land use diversification (retiring marginal areas)?
Confinement systems may work well in the northern hemisphere with different environmental constraints and market dynamics but as another comment mentioned they also have significant animal welfare issues such as cow wastage.
There seems to be a consumer awareness of distinct nutritional signatures inherent in pasture-based protein. Maybe we should leverage value out of that and focus on efficient production as opposed to mimicking norther hemisphere models and leave the undifferentiated commodity to the realm of synthetic agriculture.
Agree Omnologo there plenty of good examples of low environmental foot print dairy around country and plenty of land that is currently under dry stock or cropping that is earning very poor returns that can be converted over.
Nz don’t need to house cows to be both profitable for owner and add to export revenues.
Hans Brink,
That may be; I don't have the knowledge to argue the case either way, but I don't think it diminishes the strength of my argument. Right now, we need the income our primary producers produce-and in my view-that will not change anytime soon.
There is nothing I can see with the scale to dramatically change the economic landscape. Yes, we have a growing space industry and we have software-as-a-service(SaaS) which has had a 15% compound annual growth since 2016 and earned some $3.60bn in revenue in 2023, mostly as export revenue. According to Sense Partners, the sector is on track to hit $9.70bn by 2030.
Agree Linklater, I am not saying we don't need primary income. Of course we do. What I'm trying to say is there is very little room to increase production. Of course there can be improvements here and there but a huge increase, highly unlikely.
Some seem to think we can produce our way out of debt as a nation. Only way that would happen is if suddenly our customers were to pay double or triple the current price of our commodities. Not going to happen.
We have to find another way and the companies you mention are certainly promising.
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