Andrew's blog

Fresh Agenda and the year ahead for milk

Fresh Agenda have just produced their latest half year report about the outlook for dairy.  The report is dominated by the supply and demand outlook for dairy commodities over the next two years, considering on a country by country basis the drivers of production and use.  

Lower commodity prices suggest a lower long run milk price?

Todays gDT auction was a bit ho hum after the events of the past three months.  The index was down 1.3% with the important whole milk powder down by a modest 0.1%.  Experts agree that the market will recover; what no one knows is when that will happen and how fast that will happen - with the key influencers being NZ milk flow this coming spring and summer as well as Chinese demand.

The only certainty is change

Change of industry fortunes appears to be the norm over many years.  See the following extract from the book, 'Empire of the Dairy Farmers'.

 

 

Positive EBIT wins top award

2015 MyFarm Farmers of the Year, Angela Coleman and James DeansSouthland couple James Deans and Angela Coleman were named the 2015 MyFarm Farmers of the Year at the annual MyFarm Milk-It conference and awards dinner in Queenstown last night.

MyFarm manages 47 New Zealand dairy farms on behalf of investors.

2015-16: Milk price with a $4?

The dairy sector, the dairy support sector and most of rural NZ are holding their breath over the 2015/16 milk price.  We have had plenty of low milk price years in the past 9 seasons (three) but to date the drop in price has lifted demand and squashed supply with the result a price recovery.  In 2008/09 a $4.75 milk price was followed by $6.10/kgms.  In 2012/13 a $5.84 price was followed by $8.40/kgms.  

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.