Andrew's blog

What it is all about

The past 9 months or more has been dominated, at least in the NZ Ag world, by the fall in dairy prices.  There have been numerous articles about what has happened with an excess of supply over demand - it has almost been a perfect storm of factors including Fonterra failing to drive value add returns despite a lower cost of goods sold.  Most recently the discussion has turned to how long lower prices will last, with a low $5 milk price for 2015/16 being commonly talked about.

It's a waiting game

We seem to be settling in for a tough 12 months with another gDT fall this morning.  The fall in itself isn't that significant at 3.5% - and good to see that WMP fell less (1.8%).  But it does emphasise that supply and demand is still out of balance and that farmers will need to really hunker down on costs through the remainder of the year.

From an investment perspective, we need to see rising prices.  In the absence of that, falling land values.

Milk price drop hurts

Fonterra's announcement of another milk price drop wasn't a complete surprise yesterday but it does make life uncomfortable for all the farm businesses under our management, and for those of us who own them. 

The reduction is going to create further pressure on farm cash flows in particular during the first six months of the new season. Fortunately the moderate debt structure of most MyFarm syndicates means they can withstand this volatility.

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.