Increased world dairy production but are prices falling?

The great dairy production season continues but with other countries of the world also increasing their milk flows, at some stage price will be squeezed back as the pressure of surplus supplies will kick in.

The challenge for farmers will be to try and keep their costs of production in check as all agricultural commodities are cyclical and setting up the business with lower debt and a less vulernable cost structure will ensure survival long term.

Much of NZ's new growth will be in irrigated areas but these new developments  are all coming with heavy costs and a commitment for many years out.

Our agricultural debt is still too high, so will future large capital developments need outside investment, maybe urban and foreign, to be sustainable?

Fonterra's bumper season continues, with January likely to topple December as a record-breaking export month reports The Waikato Times.

Director of global sales Tim Deane said last month was shaping up to beat December's 246,000 tonnes of dairy exports, as strong milk production continued. Fonterra farmers at meetings around the country this week were told production was still tracking about 10 per cent up on last season.

Deane, who oversees global sales of all Fonterra products other than consumer brands and specialised nutraceutical ingredients, "We are seeing really strong demand pretty broadly across the Middle East, Africa, north and southeast Asia, China and Latin America.

Deane was confident demand would continue because GDP growth per capita and dairy consumption were linked. International prices were looking "pretty stable" given the solid demand, he said.

But caution in the wind with "Rich milk flows eroding milk prices".

Milk protein prices dropped to a six-month low, while the distant whole milk powder contract tumbled nearly 7%, leading a slide in dairy values at the latest globalDairyTrade auction, amid forecasts the correction has further to run. Prices of milk fat were also notable fallers from the last auction, two weeks ago, dropping 3.5% to an average of $3,942 a tonne, while milk powders proved relatively strong performers.

The average whole milk powder lot sold for $3,533 a tonne, down 0.8% on the last event, albeit falling to a four-month low. However, the overall move concealed a 6.7% drop in the price of the most distant lot, for delivery between August and October, signalling that buyers were comfortable to wait for a weaker market ahead.

Indeed, while prices, as measured by a globalDairyTrade index, are now down 23% from their peak, exactly a year ago, many analysts believe the correction has further to run. Wednesday's result follows a forecast from National Australia Bank that world prices will, in Australian dollar terms, average 11% lower this year than in 2011, sapped by buoyant production at a time when the economic uncertainty has quelled demand.

Output for the first half of the season, which started in June, was 9.1% higher than a year before, with outperformance expected to continue in the closing months thanks to herd growth and improved pasture conditions.In the European Union, the top milk producer, milk deliveries in November were 1.5% higher than a year before, meaning 2011-12 "is shaping up to the strongest season in over five years", NAB agribusiness economist Michael Creed said.And in the US, December production was, at 409m pounds, 2.5% higher year on year, boosted by an extra 80,000 cows and extra productivity which, over the year, amounted to nearly half a pint of milk per cow per day. "The market does appear well-supplied and all indications still point to a lower season-average price." Mr Creed said.

Indeed, while output in the major producing countries finished 2012 with a flourish, demand hopes have suffered a series of downgrades thanks to weakened macro-economic hopes. The US Department of Agriculture has, since July, trimmed its estimate for world fluid milk consumption last year by 0.4%, to 170.8m tonnes, while raising its figure for output by 0.8%.