Andrew's blog

From a Press Release from the International Farm Comparison Network

"Demand for dairy products is growing quicker than milk production growth.  This was one of the major findings released following the International Farm Comparison Network (IFCN) following their 14th annual Dairy Conference which was recently held in Turkey.

We are not bankers at MyFarm - but we are keen watchers of the market.  And we reckon the time to consider fixing interest rates is in the next one to two months.

Over the long-run, staying floating may be the cheapest way to manage mortgage interest.  But there are times, and perhaps this is one of them, when rates head up and a sensible mortgage mix with some floating and a range of fixed rate products may reduce your interest costs and will provide more certainty/less variability.

Why are we saying this?

Today's globalDairyTrade auction fell on average by 5.3% - the third fall in the exchange's average price over the last three auctions.

Yet the milk price is heading up?  How do we explain the apparent contradiction?

One of the reasons that there has been increasing Interest in dairy investments amongst investors is captured in the following chart about Chinese household wealth from McKinsey & Co.  It shows that between 2012 and 2022 the upper middle class will grow from 36 million households to 193 million households.  Not much more really needs to be said.

Although this morning's gDT result was down - two auctions in a row now - the numbers still suggest a very good milk price for 2013/14.

At MyFarm we particularly follow the WMP or Whole Milk Powder pricing which is shown below.

At the prices for September through November (the peak of the NZ season), assuming the Kiwi dollar that Fonterra trades at is approximately 84 cents, we can expect a milk price of circa $7.50/kg milksolids.

Investors want good quality dairy farms in investable chunks.  That is the inevitable conclusion after MyFarm has closed its latest farm syndicate investment, "Kauana Limited Partnership', oversubscribed.

Kauana is a 250 Ha, 700 cow dairy farm in Southland.  A good size, good farm and good address.  MyFarm has combined these attributes with quality management (employing the existing South African Managers) and strong governance support.  The business will be funded by less than 30% debt.

The average 7.3% drop in prices at Fonterra's global Dairy Trade this week was a correction many of us expected. In my opinion average prices are now a lot more sustainable and therefore likely to last longer.  Whole Milk Powder is currently fetching $4700/tonne average but with forward contracts at a fairly stable $4500/tonne through the coming spring.  This price of $4500/tonne equates to a milk price of $7.76/kg milk solids at an exchange rate of $US0.84, a nice sustainable position to be in with the 2013/14 season around the corner.

The latest gDT result - a 0.6% increase in trade weighted prices - has consolidated the bull run in dairy commodities of the past two months.

Yesterday Westpac released a report (read here) which said that NZ (Fonterra) has real market power - even going so far as to compare New Zealand dairy to Saudi Arabia and oil

Westpac Institutional Bank have published an astonishing piece of research titled 'Drought, Chinese Mums, and the price of milk".

Some memorable comments include;