By Alex Tarrant
Dairy export revenue will fall by almost ten percent next year as prices weaken, production stays static and as the New Zealand dollar remains strong, the Ministry for Primary Industries (MPI) says.
In its latest annual Situation and Outlook for Primary Industries, MPI said New Zealand’s dairy sector currently faced weakening international prices as a result of the European debt crisis and expanding global milk production. Prices were expected to ease further in the 2012/13 season, although the longer-term outlook for the sector was positive.
Steady growth in domestic production and increasing prices as a result of good demand from emerging markets, and an economic recovery in developed countries would support returns out to 2017.
"Dairy export revenue is expected to reach NZ$13.9 billion for the year ending 30 June 2012, 5.6% higher than the same period last year, buoyed by strong production," MPI said.
"As a result of the high exchange rate, low prices and static production, export revenue is forecast to decrease by 9.2%, to NZ$12.6 billion, for the year ending 30 June 2013. Export revenue is then predicted to reach NZ$17.0 billion for the year ending 30 June 2016 with an expected rise in domestic production, recovering international dairy prices and a depreciating New Zealand dollar," it said.
The European debt crisis and expanding milk supply across all major dairy exporters had seen international dairy prices fall since June 2011, MPI said.
The world's four largest dairy exporters – New Zealand, the US, the EU, and Australia – all increased milk production in 2011/12. In addition, Argentina, Uruguay and Chile, which dominated the South American market, each had double-digit growth rates in milk production.
"Weak domestic demand and low exchange rates in both the EU and US will increase supply of dairy products from these countries. This could exacerbate the expected weakening in dairy prices throughout the year," MPI said.
Butter prices had declined more than the price for milk powders, reflecting the different economic conditions in the markets that demand butter.
"Developed countries, which have been worst hit by the debt crisis, predominantly demand fat-based products such as butter and cheese. Emerging markets typically demand milk powders, which has helped prevent a collapse in milk powder prices," MPI said.
Dairy prices were expected to recover during the latter years of the outlook period (to 2017) as increased demand from emerging markets caught up with the increased supply, and a global economic recovery supported demand in developed countries.
"Southeast Asian countries, OPEC members and Russia are the dominant importers of butter and milk powder. Their positive economic outlook, driven by high GDP growth rates or high oil prices, is expected to support increased demand in the medium and long term, contributing to the recovery of dairy prices," MPI said.
"The domestic farm gate milk price is expected to be NZ$6.08 per kilogram of milk solids in the 2011/12 season, 20 percent lower than the previous season. This is attributed to the strength of the New Zealand dollar against the US dollar, as well as the weakening international dairy prices. As the high exchange rate and low dairy prices are expected to persist into the 2012/13 season, the outlook for the farm gate milk price is NZ$5.73, a further decrease," it said.
"Beyond 2013, the assumption of a depreciating New Zealand dollar and recovering international dairy prices lift the farm gate milk price, which is projected to be NZ$7.83 per kilogram of milk solids by the year ending 31 May 2016."
More soon.
26 Comments
I don't quite get this:
"As a result of the high exchange rate, low prices and static production, export revenue is forecast to decrease by 9.2%, to NZ$12.6 billion, for the year ending 30 June 2013. Export revenue is then predicted to reach NZ$17.0 billion for the year ending 30 June 2016 with an expected rise in domestic production, recovering international dairy prices and a depreciating New Zealand dollar," it said.
How is rising production in NZ (and likely elsewhere) consistent with rising commodity prices? The Ministry must be expecting almighty growth from emerging markets. Have a look at China lately. Not so strong.
And how is rising commodity prices consistent a falling New Zealand dollar?
Plenty of room for scepticism.
cheers
Bernard
You are right of course Bernard that it doesn't make sense. In my opinion its our lot of Humphreys trying to make sense of a fundamentally flawed monetary policy. They know that our exchange rate should be lower now- by 20% according to the IMF- so they know that at some stage in the future it will in fact drop to closer to fair value, on the "what is not sustainable will not be sustained forever" principle. Their guess that it will roughly be the time of a new government; and or when a new Reserve Bank governor enacts more competitive policies; is probably as good a guess as anyone's. There is otherwise no logic at all in their summary of dairy prices and volumes. Such a guess lets the government kick the can down the road for another year or two of denial in good Humphrey style.
FYI here's the reply from the Ministry via email. Many thanks to Paul Stocks.
Hi Bernard
Was just looking at Interest.co.nz and saw that you had some queries about our dairy forecasts.. We are expecting strong demand growth from emerging markets, and the growth from NZ is only 2.5% per annum by then not the 10% it was this year. Don’t forget the importance of the weather – a large part of this years performance has been exceptional pasture conditions – we can’t reasonably expect to get that every year.
On the NZ dollar depreciation, as you know commodity prices are not the only driver of exchange rate, Treasury's motivation for this depreciation is the current account position, and New Zealand’s overall balance sheet (Crown and Private I assume). This will influence international markets’ views of the value of the NZ dollar as much as will our primary sector performance.
Cheers
Paul
Paul Stocks | Deputy Director General
Policy | Ministry for Primary Industries
And my reply:
Paul
Many thanks for that.
Good to know it is a Treasury forecast. Can't blame you for that.
Our currency is ruinously high and fundamentally unsustainable. But our lack of capital controls and willingness to keep spending beyond our means (and allowing profits to be exported) means it's likely to stay high.
You wouldn't see China putting up with this. ;)
By the way. House prices hit fresh record highs in May and banks are back lending 95% and giving big break fee discounts to keep pumping the housing bubble.
We've learnt nothing.
cheers
Bernard
Thanks Bernard, it seems export receipts are secondary in influencing currency and economic health of the country. Why crystal ball gaze, when we can rely on the surety of cooperative industry, provided misguided government agendas, and other self-interest ulterior motives don’t wreck it.
I wonder if Paul regularly reads interest.co? Does he realise the MPI is scuttling the cooperative dairy industry through undermining legislation in DIRA? How is regulating Fonterra to pay exiting shareholders an artificially or speculatively (TAF) inflated share value, thus stripping generations of cooperative development, going to add efficiency and dynamism to NZ dairy industry? This requirement contravenes inherent cooperative principles, necessary for integrity and intergenerational success. Undermining the cooperative dairy industry is extremely stupid and reckless. Ha-Joon Chang, professor of development economics at Cambridge University differentiates rich and poor countries by stating
"..what really makes the rich countries rich is their ability to channel the individual entrepreneurial energy into collective entrepreneurship...However if it ever was true, this individualistic view of entrepreneurship is becoming increasingly obsolete. In the course of capitalist development, entrepreneurship has become an increasingly collective endeavour...Furthermore, in rich countries enterprises cooperate with each other a lot more than do their counterparts in poor countries, even if they operate in similiar industries. For example, the dairy sectors in countries such as Denmark, the Netherlands and Germany have become what they are today only because their farmers organised themselves, with state help, into cooperatives and jointly invested in processing facilities and overseas marketing. In contrast the dairy sector in the Balkan countries has failed...because all their dairy farmers tried to make it on their own”. (P166, 23 Things They Don't Tell You About Capitalism, Ha-Joon Chang, 2010).
Seem familiar Paul? What is the future for a dynamic and efficient dairy industry in NZ? Collapse of the cooperative model, and value returned to foreign domiciled investors?
Also a good link provided by a Henry_Tull post on cooperative capitalism if interested to broaden the governments’ horizons. Wouldn’t hurt to read the thread either.
You don't quite get this.?..you mean you sort of get this..? because that's what they hope the TAF boys will do....sort of get it.
Did you get the last auction spreads...? I didn't even sort of..! , but then I didn't need to because... there it was... and all was rosy again leading up to the vote.....
Cheesus , Fonterra's new henchmen have the most contemptable respect for their shareholders intelligence....that's the one's who are not experiencing the vice like leverage effects.
Christofff: Explain. Last week as you jacked your jaw back up off your knees I looked at the price schedules achieved and got the impression that the market-maker had gazumped prices up intentionally and assumed you were inclined to the same view ... although you didnt say so ... it could've been they were short and had to cover ...
I was implying to Bernard iconoclast , that I did not buy into the bylines being offered at the time....... and yes in the threads wit Colin Ridden I agreed you were probably about as close to the truth as you will get to know about anyway.
For me iconoclast , I 'm becoming increasingly annoyed at the growing contempt for any kind of ethics out there....it's just so in your face wit that Corporate index (finger) flicking us the bird all the time.
Contemptable respect could be described as what directors have been on the receiving end of at some recent TAF meetings. Is that so CO?
When suggested that it wasn't fair to the next generation if exiting shareholders took with them, theoretically valued, or with TAF speculatively valued, capital through the Fair Value Share mechanism; Henry preempted his justification with 'I'm trying hard not to be disrespectful'. Seems to me the shareholders are on the recieving end of any contempt.
Some of the meetings directors received what could only be called a 'torrid' time, Omnologo. Even what one of the locals called a 'Fonterra Rent A Crowd' appearing at our local meeting did nothing to stop the locals have a 'full and frank' discussion at the meeting. Sounds like you are in 'Henry's country' so perhaps he felt a bit more confident at your meeting. It was the women who were most strident at our meeting - and wallflowers these women aren't. ;-)
I reckon some at the very top of the table are not sleeping too easy. A recent poll showed 80% against TAF, though I would expect to be down somewhat come 25 June.
Let's face it, we have yet to see any figures that show that TAF is going to increase our bottom line.
Repeatedly pointed out by Henry_Tull, but countered by Fonterra, with the excuse of not having a 'stable' balance sheet.
Good to hear there is some independent critical thought at meetings in your neck of the woods. Myself CO, I only know enough that TAF will undermine cooperative, and financial security for my family going foward, so I'm experiencing a few sleepless nights as well. I'm anxious to belong to a strong and stable cooperative, not a trading platform.
If you vote yes for resolution 4, it could help to counter any yes vote for resolution 1. I hear a Councillor is imploring people who are going to vote No to Res 1 to vote yes to Res 2. If you think about it though, a No vote to Res 2 will have the Council retreating from their current position of qualified support. My understanding is that their support is conditional, on among other things, Res 2 being voted in. Res 4 is binding on the Board, which would mean a 75% vote for Res 1 - which from what I hear is a tough ask. Quite a number of people are also somewhat upset at what they see as being blackmailed by the govt over taf - if we don't vote it in, they will set the share price. Henry has said that Fonterra absolutely does not agree with the govt setting our share price. So a NO vote could kill two birds with one stone - stop taf, and give the govt a one fingered salute at the same time. Arbitarily setting the share price will not only make Fonterra governance unhappy chappies but could also prove to be a pandora's box given the volatile economic times.
If TAF goes through I hear from a reliable source that the Board is going to go on a borrowing spree of up to $1bn.
Sleep easy Omnologo. It'll all be right on the day. :-)
Omno, someone somewhere must have jotted down a couple of numbers...
Even if we turn it round, its very hard to find examples of co-ops that have failed because of suppliers wishing to redeem shares.
The redeeming of shares would seem to be the "last" thing that happens
After the war there were several co-ops that rather than fail were merged with others.
Co-ops have gone bust, by usually from poor trading results, or operational muckups (plant blowing up etc) - see Oz examples..
Here, if you look at the meat processors, it usually the co-ops driving the corporate players off - Any one still got Fortex shares....
Dairy-wise its less than clear, corporates we have Bright's synlait, Singapore/Talley Open Country, the busted Russians NZ Dairies....... but the other co-ops Westland etc seem stronger...
To date we cannot find an example of suppliers wishing to redeem shares having driven a co-op to fail...
If BH or any one else has an example, please post the details.
The other way we looked at is, under what conditions would suppliers rush to redeem..
We found:
1. Gaming the co-op (eg when shares were worth $6.50). - more a muck by the co-op
2. Other farming systems were more profitable - few and far between; Our thinking was if another pasture/livestock class came along, fonterra would follow its suppliers....
we have seen some Taranaki hill sheep/beef farms with disused sheds (walk thrus) from 50 to 60 years ago) - we remember the Korean wool boom http://en.wikipedia.org/wiki/New_Zealand_wool_boom... deer recovery in 1970's http://en.wikipedia.org/wiki/Tim_Wallis .. or some kiwifriut dev in 1980's.. http://www.bisoncentre.com/index.php?option=com_content&view=article&id…
If we all milk goats then fonterra would probably move to be process that as well..
Is this the govt thinking toward stripping a dividend out of fonterrra's farm gate price (pushing it to a corporate path seems a side affect).
This could explain why no body can seem to explain why TAF is the primary reason........... (because maybe its not) .....
Is it that govt wants a brake/control on the milk price gives them power over other parts of the economy ........
right price for whom .......
Note to self: Supplier-wise, do not sell the dividend rights, as a % of return per kgMS they would seem be set for increase (even if total returns decline)?....
http://www.mpi.govt.nz/news-resources/publications
Page 15: White gold: the importance of the price of milk to the economy
Dairy products are vital to New Zealand’s economy. They make up over a quarter of our
merchandise exports and are a key economic driver. They are also important to us as consumers.
It follows that the “price of milk” is vitally important. As a small exporting nation, we are largely reliant on international prices. But while high international prices mean exports earn more for New Zealand, driving economic growth, they also mean consumers pay more for milk. This has been the trend over the past decade. The result has been a “dairy boom”, which many credit as helping us through the worst of the downturn, that has been coupled with calls for retail price controls.
Indeed, while international forces drive prices, we need to ensure that our domestic markets are operating effectively. Parliament’s Commerce Committee is inquiring into the price of milk in New Zealand and whether our dairy markets are operating effectively at all levels. The committee is expected to report its findings in 2012.
The government’s recent focus has been on Fonterra’s farm gate milk price – the price that Fonterra pays farmers for milk. But why does this price matter for the economy and why focus on Fonterra’s price when there are also other dairy processors in the market?
Fonterra has around 90 percent of the market for farmers’ milk, which means the price it pays its farmers is effectively the default price other dairy processors need to pay to compete.
Therefore the price Fonterra pays affects not only Fonterra’s suppliers and Fonterra’s
profitability, but also the shape of the industry – how many processors will compete and what products they produce. It also affects the profitability of dairy farming and hence land prices and land-use change over time.
The government is looking to bolster incentives for Fonterra to pay its farmers the “right” price to ensure that the market remains efficient and contestable. This should ensure the market is innovative and efficient, to the benefit of all New Zealanders.
Neat summary of NZX dairy futures - last 3 paras only. Note the volume is nothing.
Will this go the same way as wool future, remember the 35F2D....
With the White gold item above, we can see their thinking.....
http://www.mpi.govt.nz/news-resources/publications
Page 16: Dairy futures
Increased price volatility in global dairy markets has encouraged the emergence of dairy
commodity futures markets as a means of managing price uncertainty across the supply chain. Volatility of dairy commodity prices has tended to increase in recent years as a result of faster growth in global demand, combined with multiple unpredictable factors affecting supply such as extreme weather, changes in biofuel policies and trade restrictions.
Commodity futures markets can perform several functions but their primary purpose is to
manage risk and smooth price volatility by creating more price certainty, transparency and a forward view of market sentiment. Markets have operated globally for a number of years for a range of products including wheat, corn and coffee.
In the dairy industry, product purchasers look for certainty in both supply and price. For
processors, risk lies in a combination of prices paid for liquid milk and forward sales prices of manufactured product, while farmers are seeking greater price certainty for their raw milk.
In 2010, NZX Limited launched NZX Dairy Futures. Whole milk powder contracts were the first to be offered, followed by anhydrous milkfat and skim milk powder contracts early in 2011. Options contracts were later introduced for whole milk powders.
In little more than a year, the market has grown to be the largest globally traded dairy futures market, having traded over 20 000 lots (tonnes) at a value of over NZ$80 million. Month on-month trading growth exceeded 100 percent early in 2012. This is typical of a new market, where growth rates increase as liquidity builds, attracting more participants, thereby increasing confidence in the market.
There are two main differences between the NZX Dairy Futures market and other similar
markets. First, the NZX Dairy Futures contracts are “cash settled”, meaning that participants do not have to make or take delivery of a product at the expiry of a contract. This reduces the need for complexities around food safety requirements and product specifications. Second, the contracts are settled to GlobalDairyTrade reference prices. This means that when a contract expires, the final settlement price of the contract is fixed to the current price of an identical, physically traded product on a transparent global market.
Second, the contracts are settled to GlobalDairyTrade reference prices. This means that when a contract expires, the final settlement price of the contract is fixed to the current price of an identical, physically traded product on a transparent global market.
Have I missed something? Where is that 'transparent gloabl market'?
Relax Bernard and co. One Waikato farming leader suggested TAF was necessary to insure dairy farmers against an appreciating $ in case discovery of hydrocarbon fields.http://www.stuff.co.nz/waikato-times/farming/6834671/Official-cash-rate-is-something-that-affects-all-of-us
Our industry leaders are already becoming currency traders before TAF is introduced. What are your thoughts on TAF insuring Fonterra supplying shareholders who rely on exporting against a volatile currency?
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