Andrew's blog

Silver lining for dairy - if there is one!

2014/15 has been a year to forget from a dairy investment perspective.

The industry still has a positive outlook based on long term demand growth, and NZ has a cost of production advantage versus our competitors.  However this year a number of factors have combined to create a bit of an 'Annus horribilis'.

To recap on what has happened;

Supply and demand will sort itself out...

There is some hand wringing going on at the moment about the state of the dairy commodities market.  

Two steps forward, two back

The 10.8% drop in prices at the global dairy trade auction last week unwinds the gains made in January and February.  It will put some pressure on the 2014/15 $4.70 and could affect the 2015/16 season open.

Two steps forward, one back

This morning the recovery in dairy prices seems to mimic the saying in this blog's title with gDT prices falling by 8.8%.  This follows successive rises since mid-December.  It appears that the fall wasn't triggered by the 1080 poison threat - rather simple supply and demand forces.

Fonterra had sent mixed messages to the market, whilst reiterating their forecast that milk supply would be down by 3.3% year on year, they increased their forecast volumes to be sold on gDT.

Kiwifruit on the rebound

Zespri is the focus of a good piece in this morning's Domion Post.

Journalist, Gerard Hutching, profiles Zespri chief executive, Lain Jager and his own journey since joining the co-op in 1999. Jager was appointed CEO in 2008 and PSA hit the industry's vines in 2010.

If you live outside of major kiwifruit growing regions such as Bay of Plenty you can be forgiven for not realising the extent of change in the industry since the late 1990's and how well it has bounced back from PSA. 

EU milk growth slowing

A story out of the UK yesterday makes for encouraging reading for anyone interested in where global milk supply and demand is heading.

The European Commission is saying that milk output growth in the EU, which is the world's largest producer (and second biggest exporter), is to slow this year despite the ending of quotas. The EC is forecasting milk deliveries to EU processors to increase by 1.2% in 2015, compared to a 4.5% increase in 2014.

The EC report notes several factors that will have a moderating effect on supply growth including:

Cat and mouse

World dairy markets appear to be going through a game of cat and mouse at present.  gDT has bounced nicely since its low in December, with a slight pull back in WMP pricing at the last auction.  The bullish sentiment seems to have evaporated somewhat as also evidenced by the NZX Futures data.


The changes over 1 month in futures price sentiment is large as shown in the following chart.

The view from Australia....

The following is the view from "across the ditch" which I thought makes interesting reading.

"The dynamics, including increased Chinese interest, required to spark a revival in dairy prices are beginning to slot into place, although the market is "unlikely to stage a dramatic recovery any time soon".

Turning the corner

The gDT auction yesterday was a pleasant surprise.  But not surprising at the same time; I had personally expected a 10% gDT rise at some time - but my pick had been prior to Xmas.

What has happened?

The first point is that China is starting to buy again.  They bought a similar amount of WMP from NZ in 2014 as they did in 2013 but the buying pattern resulted in high demand 1H 2014 (along with high prices) and low demand in 2H 2014 (with low prices).

A week of good signals

Fonterra’s milk price forecast ($4.70/kgMS) for this season is looking more realistic and looking out to 2015/16 a milk price around $6.40/kgMS is achievable. Here’s why: