The Weekly Dairy Report: More disapointment via the milk auction as the sector digs in for a long haul

DAIRY

The heat and dry intensified last week in the central South Island and lower north Island regions, setting the scene for an autumn where dryland pasture is short, brassica crops are struggling to fill out before winter, and the Opuha irrigation restrictions return.

Southern regions had the first frost of the year last week, but significant rain overnight of about 25-35mls will at least be a start and will revitalise winter feed crops and give managers an opportunity to push feed ahead into the autumn by lengthening rotations.

However such is the seriousness of the dairy downturn even the weather has taken second place, as Fonterra reduced the payout to $3.90/kg ms and reports from Open Country Dairy, suggests the third settlement period is even lower than this.

Everyone has got very jittery about the financial insecurity, although Fonterra has been quick to reassure the market it is comfortable with it’s debt and will reveal details to the market on March the 23rd about it's profit forecast, and possible further shareholder assistance in these tough times.

The Co-Op’s decision to enforce a 90 day payment provision on many of its contractors has caused plenty of negative comments about these bullying tactics, and portrays a feeling that management seem isolated from the crisis.

Sadly talk has now turned to how many farmers will be at risk, and figures of between 15-25% could fail shows the enormity of the situation, and this reversal will take many years of recovery.

With 10% of all dairy farmers responsible for 30% of the total dairy debt and some analysts estimating they have $10 million borrowed per farm, these will be the operators most at risk.

Over night the auction reinforced the volatility of the market as against expectations another 2.9% drop occurred for the mix of milk commodities, although Whole Milk Powder prices were stable.

Volumes offered were the lowest for the year, but the EU announcements of support for their farmers may have given a message of a continuing  global milk surplus and the traders decided to step back and wait.

The core issue of global over supply is illustrated by the European Union predicting it will receive significant increases in milk output this year and next, but demand will only consume about 40% of the global surplus.

Synlait report they have signed up more farmers to supply milk for their growing nutritional business as that company looks to minimise it's exposure to milk commodity production and the cashing up of Fonterra shares may release much needed capital for some.