There is a certain level of trepidation in New Zealand waiting for an imminent announcement from Fonterra on the 2014-15 payout review.
It could come any time in the next few weeks.
Following the recent 9% fall in dairy prices at the GlobalDairyTrade auction, observers are vying with each other to guesstimate the downward revision.
Fonterra started the season with a $7/kgMS indication, but recent talk is for something closer to $6.
Most of the gloom relates to the view that China's import demand is tailing off as local farms raise output, and coupled with rising international production levels and availability of product for export to China.
But that is not how the USDA sees it.
Their view is widely respected because they have a deep agricultural intelligence base and a highly respected way to forecast rural commodities.
Their July 2014 Report is not pessimistic.
In fact, they are noting China is importing milk powder in 2014 "at a breathtaking pace".
And they see other dairy commodities such as cheese and butterfat surging into that market at an 'accelerating' pace.
Although there has been speculation that China’s volume of dairy imports were set to decline in 2014, the pace of imports of milk powder during the early months of 2014 continue at a breathtaking pace. Imports of skimmed milk powder (SMP) through May are up nearly 89 percent to 131,000 tons and imports of whole milk powder (WMP) are up 70 percent to 487,000 tons.
As a result, China’s 2014 import forecast for WMP has been revised up sharply by 54 percent to reach a record 1.0 million tons while the import forecast for SMP is raised by 10 percent to 330,000 tons. There are now signs that China’s dairy market is evolving as imports of other dairy products such as cheese and butterfat through May 2014 are accelerating – up 67 percent and 121 percent, respectively, over the same period last year.
Not only do they have a positive view of China's demand, they also have a different view of China's production.
They now say Chinese production will in fact be lower than has been earlier forecast.
The USDA lowered its estimate for milk production by 1 mln tonnes to 36 mln tonnes "as stricter health requirements for milk are expected to lead to reduced supplies from small-scale dairy farmers". Still, that will be about 5% higher than 2013.
There were other reasons to expect buoyant demand too, with the history of tainting scares in China's dairy sector still prompting "concern" among consumers over the quality of domestic supplies.
"Consumers appear motivated to pay premium prices for imported products such as milk powder and fluid milk," their Report says.
New Zealand appears to be the main winner in the scramble for Chinese milk product business.
The USDA sees New Zealand output growing +6.5% in 2014 over 2013 leading all the major dairy exporters. That is on the back of an additional 70,000 cows.
They see the EU output up a similar amount but note that it is very sensitive to price and the recent falls will temper output in the rest of the year.
The American product availability will be up too, but only +3% on the back of only 10,000 more cows, they say.
Australia and Argentina will have little impact.
Interestingly, they note that China's dairy output will be constrained by the high demand and high prices for beef, prompting a higher slaughter rate.
New Zealand is likely to continue to be the main beneficiary of China’s rapidly expanding demand for WMP since it supplied over 90 percent of China’s WMP imports in 2013. During the January-May 2014 period, some 90 percent of these imports have also been sourced from New Zealand which benefits from low tariffs due to a China-New Zealand Free Trade Agreement. In addition, in March 2014, China and New Zealand announced a joint currency agreement allowing New Zealand dollars to be directly traded with Chinese Renminbi.
The USDA Report suggests the local rush-to-judgment for the 2014-15 season may be a bit premature.
21 Comments
Fonterra is a processing company putting it's product to auction (hence the reserve).
Venezuela is a country/government.
The reserve would be at minimum price of production, with proper labour and return of capital observations. ie what a normal non-subsidised producer would have to sell at to breakeven. NZ taxpayers should not be subsidising Fonterra pricewars to move product - suppliers need to be seeing proper yield on land and capital, and paying landlord-type taxes on that portion of the yield.
Fonterra does effectively set a reserve in the opening price for the auction. That used to be set at around 15% less than the selling price at the previous auction. I don't know what they do now but see that in the last auction Contract 2 Instant WMP was down 17% over the two weeks - from USD 3,865 to 3,205.
I mean a real reserve based on production costs (suppliers as well as Fonterra's).
I saw recently an artiocle saying it's now faster to pay off a farm than so many years ago (20? 50?)... but I'm betting that they're forgetting all the expensive equipment that has to be brought and front loaded in the accounting cycle to boot. Can't just chuck a boy on a busted up two wheeler and expect him to work nowadays. And good luck spraying a 700cow herd farm with a backpack sprayer...
There is effect no difference, both are trying to price fix. ie do away with the free market.
Besides that, if the cost of production exceeds what ppl can or will pay then demand falls or even ceases. We can see that effect with oil and many other goods.
For instance cheese etc prices took off a few years back and the demand for the milk based products in NZ took a big hit I believe?
What that does do to the future availability of the good then gets interesting. If the price ppl are willing or able to pay is below the cost of production, either production ceases (cmpany ceases trading) or as with oil other goods in ppls basket of purchases drops to compensate.
People can of course do without milk products it isnt an essential.
regards
I would suggest reading the USDA document that David links to, noting that it is based on prices to the 4th of July (before the last gDT auction). The USDA now has more recent prices - to the 18 July that have fallen further. With figures only to the 4th July the USDA publication still has this to say:
Despite strong global import demand, the surge of additional product on the markets has put downward pressure on prices particularly for WMP which has declined sharply from around $5,100 per ton(FOB Oceania) in January to around $3,700 per ton (FOB Oceania) in early July – down almost 30 percent from the early part of year.
Colin can we safely rule out the possibilty that the not so savoury China Commodity Financing Deals (CCFD) might be the spur for the type of milk powder demand noted by David Chaston?
I don't think you can rule it out.
What we are getting - from NZ media and politicians through to the USDA - is the avoidance of any recognition that some of China's commodity demands are likely to have been artificial.
If that is the case then more than a few governments' economic development policies are going to fail, and be seen as failures.
Shouldn't we be seeing that possibility discussed?
My question would be - given that WMP price was expected to drop, has it dropped further than expected or to about where it was expected to go?
As a farmer, I am not concerned about the drop unless it goes below $3000/t and stays there for a sustained length of time and the dollar gets closer to parity with the USD.
If you are in the industry and keep up to date there have been more than one instance of people warning that the unusually high prices lasted much longer than expected, and prices would come down. Rabobank Agribusiness Report said as much in July. http://www.rabobank.co.nz/Research/Documents/Agribusiness_monthly/2014/…
Hence farmers budgeting on $6.25kgms despite $7 being announced. If farmers are aware, the govt etc will be aware too.
What surprised me about the last gDT auction was that the price dropped significantly despite the volume on offer being reduced 12% from the first auction in July.
Various commentaries (USDA, Rabobank) are saying NZ and Chinese dairy inventories are plentiful. Goldman Sachs are reporting an expected over supply of world milk supply till 2018.
I don't know how reliable any of that analysis is. What is noticable is the variance to what they were providing only a few months ago.
What has changed so suddenly? I don't see that being discussed but I think may be to do with surprises from weaker real demand and expectations that it may last for longer.
The USDA report David linked to talked about Algeria importing more milk powder in one month than they normally do in year. That may sound good but not if - as I believe - Algeria is NZ's market of last resort.
Colin , if it is true that downward pressure on prices is occuring from surge of additional product on the markets, then why is Fonterra producing more mega-milk factories in China? Surely if the bold assessment was true then the shareholder representatives would have legal duty-of-care to stop Fonterra suppressing the suppliers-shareholders returns.
I think the NZ dairy industry is currently facing a quadruple whammy:
1. Increasing supply here and in other parts of the world.
2. Real Chinese import demand growing much less than people want to believe.
3. Increasing production costs.
4. Government pushing increased dairy production based on poor market intelligence regards one & two and poor economic analysis of three.
Fonterra's performance is a possible 5th but mostly for their suppliers.
Some the above chickens are now coming home to roost.
An acquaintance, at the highest level of business, was telling me how he met a person who was an 'International Mystery Shopper' (IMS). The IMS was employed by a large Asian electronics company to see why there weren't doing so well in Europe. IMS goes off the Europe and checks out some stores then goes back to Asia and goes through the companies financials with a very fine tooth comb, but with the attitude of a rotweiller looking for a bone. They then write very comprehensive reports on why the company isn't doing well in Europe plus how the company is really doing financially. I wonder if Fonterra Shareholders Council would have the cojoines to give the IMS a call - ah... of course not...silly idea. ;-)
I'm thinking that its a demand/ supply problem and will be corrected when production falls.
In the States they are thinking the oversupply will last till 2018
Although China will eventually return to the market, the effect of China’s recent stockpiling could be felt for years to come. Amid the surge in demand and high prices over the past year, farmers in New Zealand invested in in bigger herds and nutritional supplements. According to Goldman Sachs annual global dairy output will exceed demand by 2 billion litres through to 2018 – enough to fill 800 Olympic-size swimming pools. In recent weeks consumer brands from Starbucks to Hershey’s have hiked prices, blaming rising dairy prices among other commodities for the rise.
http://materials-risk.com/dairy-prices-plunge-38-chinese-demand-dries/ I end up in some wierd places but this from Ireland;Found something very strange on the SEAI (which is a Irish neo liberal energy outfit)
It forecasts a massive rise in Irish agricultural energy inputs.
This can only be acheived via the destruction of the Irish farm and the introduction of massive indoor American ranch style production
(Irish farming remains chiefly a outdoor grass grazing system)
Y2011 Irish energy farm inputs : 251 ktoe
Y2020 Irish farm emergy inputs : 2,001Ktoe
This is off the friggin scale
All other areas of the irish economy is forecast to contract or remain static in its energy consumption
8 times more energy? when energy is getting more and more expensive?
URL btw please?
I can find http://www.seai.ie/ but that doesnt tie up with "Irish neo liberal"
regards
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