Andrew's blog

gDT up but some mixed signals

gDT rose this morning by 2.4%.  As can be seen from the following image, Butter, Anhydrous Milk Fat and Butter Milk Powder all rose strongly.  There were a couple of falls but even Whole Milk Powder rose by 1.4%.

Remaining confident

2014/15 will be a low point in terms of milk price and dairy farm profitability.  The highs of 2013/14 seem a long time ago.

A few charts are illuminating.  The first shows what has happened with Chinese Demand; they bought heavily in H1 and are now drawing on reserves H2.  The consequence was a high milk price in 2013/14 and now a very low milk price in 2014/15.

Taking the long term view

This week Fonterra and Open Country have announced further reductions in their forecast milk prices for this current season to $4.65/kgms (OCD) and $4.70/kgms (Fonterra). Synlait has also indicated its price to suppliers this season will "start with a 4".

These are unpleasantly low milk prices and unfortunately many dairy farm businesses will struggle to generate profits at this price level.

All eyes on gDT (again)

The last gDT result was interesting in that there was a significant step-up in forward prices for whole milk powder delivered in contract periods 4 and 5 (four and five months in advance).  March prices were up 7.5% and April prices were up 10.4%.

This may, or may not, indicate increasing interest in next year's production and an increasing price trend.  The auction this week will be interesting - particularly the forward prices for WMP. 

Farmers need help

Farmers are struggling with cost appreciation - with an increased cost structure of 40% since 2005.  And milk prices have been coming back regularly - farmers need support managing volatile milk prices.

This message would resonate well in NZ, apart from the 'support' part.  This is a reworded extract of an article which quotes the President of the Irish Farmers Association:

Graphs tell the story

Another big fall for gDT prices today; Whole Milk Powder prices falling by 10% today.  A lot has happened in six months since record breaking prices with the Kiwi dollar now starting to respond.

An analysis of gDT results show previous down-turns in terms of the number of fortnights from the point of price reduction - the data is cumulative.  At present the price reduction is looking similar to the 2008 event.  Recovery in 2008 occurred quite quickly with a very good milk price received in 2009/10.

What $5.30 means

Today Fonterra announced a further revision of the milk price of $5.30 per kilogram of milksolids for the 2014/15 season.  It seems a long time ago since it was $8.40/kg; we are still receiving the final top up payments from that stellar year.  The revision today follows an opening price of $7/kgms and a reduction to $6/kgms in July.

The reductions reflect an overhang of supply, particularly from NZ but also from the EU and US, and stockpiles built up earlier in the year.

A 'Phew moment'

There is always a point where a market in decline rights itself (assuming no fundamental demand issue).  It is too early to say we have reached that point after gDT had a "0% change result" last week.  But there are a number of factors which do suggest some optimism.

Interesting week...

Good to see some positive direction come out of Fonterra this week with the announcement of their investment in, and joint venture with, Beingmate from China and the plant expansions in the Waikato and Southland.  

Where will all the Cheese go?

Russia has announced a ban on food imports from many western nations including the EU and the USA (not NZ).  Russia is a major importer of cheese - most of the exports from the EU and US are cheese as shown in the following graphic from Fresh Logic.