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
Of course, it is all positive (unfortunately for others) in Southland where summers are normally wet (and summer rainfall has been reasonable this season).
Dairy commodity prices increased overnight - there have now been increases for eight auctions in a row. This was again a double digit increase averaging 14.2% across all products as non-whole milk powder products 'caught up'. As shown in the following graphic, whole milk powder is now over US$5100 per tonne and in uncharted territory.
Fonterra's decision to increase its forecast farmgate milk price from $5.50 to $5.80/kg MS brings welcome relief to drought stricken farmers. See NZ Herald's coverage here.
Agriculture’s effect on the NZ economy is continually underestimated, at least in my opinion. Perhaps the evidence base for most economists and their view of how the economy works is the mid-2000’s (2002 – 2006) when both dairy and sheep and beef bumped along and were neither spectacular nor disastrous. The drivers of growth during this time were house price inflation (read Auckland housing) and consumer spending (read flat screen TVs).
I love the use of adjectives in BNZ economist Doug Steel's email below. As he points out global dairy prices are up a "staggering" 77% since mid May last year. Couldn't have said it better myself.
From: Doug Steel/WLG/BNZ/NAG_AP
To: Doug Steel/WLG/BNZ/NAG_AP
Date: 20/03/2013 08:33 a.m.
Subject: Dairy prices go parabolic
________________________________________
Economists are tipping a lift in dairy payout after a 10.4 per cent surge in the average price on Fonterra's latest Global Dairy Trade (GDT) auction, as product-hungry international buyers reacted to a shrinking world dairy supply.
The BNZ and Westpac predicted Fonterra's payout forecast for the 2012-2013 season would get a nudge up from the auction result, which saw the average price of wholemilk powder break through the US$4000 ($4810) per tonne barrier for the first time since March 2011.
MyFarm held its bi-ennial investor conference last week. There was a lot to come out of that but in a presentation by Detlef Schoen, CEO of Aquila Capital Farms, he emphasised the importance of maintaining the NZ industry's cost of production advantage. On-farm costs have risen by 15% in the past three years as a result of higher people, fertiliser, feed and general farm expenditure appreciation. He noted that top farmers in some regions in the EU and US are achieving costs that approach ours with large confinement systems.
New Zealand is in a frenzy about the high value of the New Zealand dollar. Some political parties are talking about the need for quantitative easing and other techniques to lower the value of the Kiwi to 'enable exporters to better compete'.
Although by many measures the Kiwi is overvalued, there is a growing body of evidence to suggest that a higher exchange rate is here to stay. The latest view on this is in today's NZ Herald - the CEO of Fisher & Paykel Healthcare saying perhaps the current high rate is a 'new normal'.
Last week Fonterra, Dairy New Zealand, DCANZ (NZ dairy companies) and a number of others announced a refreshed version of the Clean Streams Accord which is an industry attempt to take the public’s environmental concerns seriously.
At MyFarm we support this initiative. To be brutally honest, if there wasn’t an accord like this there would probably be more legislation which is generally a ‘blunt instrument’. But on a more positive note, we think that a refreshed accord like this can do a number of things including;
gDT, the dairy commodity trading platform originally established by Fonterra, saw the fifth straight rise with prices rising on average by 3.1%. Whole Milk Powder, the product that drives the NZ milk price rose by 5.8% to an average price of US$3,654 per tonne.
Commodity prices are cyclical – that is why MyFarm has, over many years, targeted high quality farm investments with lower levels of debt which are still profitable at low points in the cycle.
2012/13 has been a low point in the cycle with the milk price at $5.50 per kilogram of milksolids.
All indicators suggest a very much better outlook for 2013/14 and 2014/15.
This week's globalDairyTrade was interesting for several reasons. Firstly, would it confirm the firming price trend that has occurred over the past five months? But secondly, would there be any effect from the DCD contamination scare which was first in the media spotlight about 10 days ago.
This summer has been yet another reminder of why MyFarm has invested so heavily in Southland. Simply put, no other province in New Zealand has it so good. Below you can see a couple of photos taken by one of our Southland supervisors, while on farm visits two weeks ago. They make a stark contrast to the parched conditions in many other dairy farming regions across New Zealand.
Although we are an isolated country, our economy is reliant on exports and is therefore dependent on the economic health of our trading partners.
Recent growth numbers from China and Asia appear to be heading in the right direction which suggests on-going demand (and price) growth for our dairy products.
The 'DCD in milk' issue has been fascinating to watch - and has been another poignant reminder of how critical food safety is to the NZ milk brand.
I refrained from making to too many comments or predictions on this one earlier in the week. Whilst the information here in NZ has been unequivocal - "this is not a food safety issue" once initial concerns were addressed it was always about perception rather than reality.
Our resident Southland photographer, Jeremy Pierce has just sent us this amazing timelapse photography project captured during two months of cowshed construction at one of our Southland dairy farms. We like it!
Overnight the globalDairyTrade trade weighted index was down 2%. WMP (whole milk powder) down 3.5% to US$3,170/MT, SMP (skim milk powder) down 1.0% to US$3,362/MT, AMF (Anhydrous Milk Fat) up 3.7% US$3,197/MT.
There was excitement amongst the investment community on Friday the 30th of November - the day that Fonterra units were listed on the NZX. Jumping from $5.50 to $6.85 by close there was clearly huge demand for the Fonterra and dairy story.
We all know that dairy dominates the NZ export economy. NZ investor ownership of farmland is tiny - probably less than $1 billion - held by NZ Super and investors in farm syndicates.
Why does a dairy farm investment deserve consideration despite a relatively low milk price currently? What is the outlook for 2013/14 and 2014/15? And how strongly do the supply and demand trends really support dairy?
For answers to these questions, plus a discussion on the 'buy Fonterra shares or buy a farm' debate, see the following Dairy Investment Outlook.
In many respects it has been steady - and off a low point - but buyer demand has kicked in with a further rise in gDT again this morning of 1.1%. This now totals a 29% rise since the low point in the market in mid-May.
These are exciting times in our dairy industry - with growing international demand for our products and the recent launch of Fonterra's shareholders Fund.
I am fully supportive of TAF and my own dairy farm business is fully shared up. I share the view that the public will be quick to snap up shares in Fonterra's shareholders fund because they want to share in our industry's sucess.
If anyone regularly reads these blogs (who knows?) they would notice that a lot of them are about the milk price. We are at risk of becoming tedious - but this is another one.
The reason is that we sometimes seem to be leaning against the tide - conservative bank economists (actually I would concede that is a good thing) and uninformed comment seem to dominate the media at the moment.
So yet again we point to an improving outlook and increased prices.
Predictions of a drop in dairy farm incomes in the latest MPI Farm Monitoring Report provide a platform for the usual doom and gloom merchants to get themselves some sensationalist media coverage, but, in my view, they give a distorted view of what is actually a very positive outlook for dairying.
The gDT result overnight - whereby the average auction price increased by 1.8% - belied the strength of the market. From the following summary, WMP increased on average by more than 9% with particularly strong sales in the months either side of Christmas.
After a flurry of price rises dairy commodities have taken a breather over the last few weeks. Irrespective of the result of this week's gDT three things suggest a very good outlook for at least the second half of 2012/13 and for 2013/14.
Yesterday's slight reduction in globalDairyTrade results was neither here nor there for the current season. The overall index fell by 0.9% with falls for Cheddar, Casein and AMF but with a 2.8% increase in Whole Milk Powder. Of note was WMP sales values into the 2013 calendar year which were up in value by 8%.
I apologise in advance if I offend any one but I have seen this a number of times and it is still funny. I wonder what they would say about MyFarm Syndicates (the only thing I can think about is the rigmarole we go through every year grazing out 25,000 cows in Southland - but then that isn't very funny).
Hopefully because everyone is the "butt" of the humour I can get away with it.....
In today's NZ Herald (I like the new look website) Brian Gaynor compares the growing rural economy with urban New Zealand in terms of their outlook, attitudes and opportunity to grow - see
Although the increase wasn’t great – at 2.4% the latest globalDairyTrade result was a very good one. It is 4 years since there have been ‘four in a row’ positive adjustments.
Key movers were;
WMP (whole milk powder) up 2% to US$3,036/MT
SMP (skim milk powder) up 4.7% to US$3,339/MT
AMF (Anhydrous Milk Fat) down 9.8% US$3,199/MT
In particular it is pleasing to see WMP up over $3000 per tonne.
A good summary from the NZ Herald follows analysing the latest gDT auction result. Looking at the auction data there is still a lot of potential for further price rises - Whole Milk Powder is still trading at around US$3,000 per tonne when they could (should) be around $3,500 to $3,750/tonne.
Dairy prices rose to the highest level since early April in the latest GlobalDairyTrade sale, the third straight gain, with increases for all eight products on offer.
The week started with an unexpected reduction in Fonterra's milk price from $5.50/kg milksolids to $5.25/kg. A reduction wasn't a complete surprise but this blogger had mixed up his Fonterra board meeting dates and had thought no news was good news.
It is hard to see the funny- or up- side of a price reduction. But the Fonterra press release was quite positive trying to balance the strength of the $Kiwi (negative) with increasing market prices.
Every Thursday the "Drought Monitor" releases their revised assessement of the status of US farmland. In summary their latest release shows;
TOO DARN HOT: The USA's most withering drought in decades only got worse in key farming states last week despite cooler temperatures that provided a break from the stifling heat, according to a new drought report.
WITHERING CROP: Just over two-thirds of Iowa, the nation's biggest corn producer, is in extreme or exceptional drought, up more than 5 percentage points from the previous week.
globalDairyTrade, the online dairy commodity auction established by Fonterra, rose by a surprising 7.8% this morning. Market watchers had expected a rise following the worsening of the US drought - futures prices have been tracking up in the past two weeks. 7.8% though was a big result given the volume of product sold at more than 43,000 tonnes.
MyFarm forecast rising milk prices with the eventual outcome a milk price with a '$6' at the start.
It doesn't feel quite right to feel happy at someone else's misfortune but many American farmers have crop insurance - so I'm making an exception to this rule.
Westpac discusses their milk price forecasts and outlook for the coming dairy season in the section below. MyFarm believe dairy prices will respond more sharply in 12/13 in response to decreasing supply from the Northern Hemisphere.
Good news for dairy farmers; this morning's globalDairyTrade auction was up 3.5% despite selling the second largest volume of product for the past 12 months.
Today's auction was a monster with 47,370 tonnes of product on offer (46,682 tonnes sold), the largest volumes available since September 2011. In the past three months larger auctions have been greeted with lower prices so it was very pleasing to wake this morning to see a strong price increase.
In their latest industry note, Rabobank have given credence to the theory that the US drought will result in an early recovery in dairy commodity prices.
Despite some rain in some regions last year, the drought in the US is continuing to take its toll on corn, soya beans and as a result on the livestock and dairy industries.
When a person gets busy it's easy to get behind on the reading. But never-the-less reading is, at least for this writer, a key to thinking about the future.
Nearly a week late I've finally got to Nevil Gibson's column on page 16 in the 20 July issue of the NBR. Although the article is written from an Australian perspective it is directly applicable to NZ. Some interesting points;
Although gDT, the online dairy commodity auction, was down today (0.9%), the outlook is increasingly promising.
Firstly, NZX dairy futures are up - current whole milk powder prices (WMP) are $2775 yet the futures price is at $3400 for January 2013.
Secondly, the drought in the US midwest continues to grow worse. Official sources suggest that the current drought is the worst since 1956 which is having a major impact on coarse grain supply and dairy farm feed costs.
Reading this months Agrifax Monthly dairy report is a reminder that dairy downturns tend to be short - in general no more than one season (and sometimes not that long).
Agrifax are forecasting the following milk prices;
2012/13 - $5.60/kgMS at 78.5 US cents to the $Kiwi
2013/14 - $6.40/kgMS at 78 cents
2014/15 - $7.35/kgMS at 77 cents
So like previous times in 2003 and 2009, a year of lower prices followed by three or four better years,
Having spent a week in Europe it is clear that there has been a sea change in the investment world. The change has probably been there for a while but there is nothing like breathing it to bring the message home.
On Monday Fonterra shareholders gave the green light for Trading Amongst Farmers. It wasn't a slam dunk - in fact much below the 66% vote in support and the Board of Directors would have struggled to claim a mandate for this policy. As it is there is one out of three shareholders that didn't agree with it. Some fence repairs will be required from the Board. Taking proposed capital restructuring off the table for at least the next five years would be a good start.
The latest increase in globalDairyTrade prices last week was a positive shock (the weighted average product index rose by 13.5%). We have had a series of negative sales in response to a very big increase in supply from NZ and to a lesser extent Australia, Europe and the USA. It was inevitable that international dairy prices would fall in response.
The latest increase in globalDairyTrade prices last week was a positive shock (the weighted average product index rose by 13.5%). We have had a series of negative sales in response to a very big increase in supply from NZ and to a lesser extent Australia, Europe and the USA. It was inevitable that international dairy prices would fall in response.
It was good to hear my fellow MyFarm Director Grant Rowan step up to the plate on why we support Trading Among Farmers on Radio New Zealand's morning report. We think TAF is a good thing and we will be voting accordingly.
Grant was interviewed alongside anti-TAF campaigner and fellow dairy farmer, Leonie Guiney. You can listen to it here.
This morning Fonterra announced what on first view seems to be an okay milk payout forecast of $5.95 to $6.05/kg milksolids. At MyFarm we are optimists (and history is on our side) but there are a few little fish hooks in the announcement;
Although the milk price outlook isn't that great for at least the next three months, interest rates are certainly helping out. The following chart shows that swap rates are the lowest they have been in recent times, even accounting for the GFC and Christchurch earthquakes. We have had five year rates quoted to MyFarm at under 5.5% p.a. A very good time to fix funding costs?
The last month has been an interesting old time - again. This financial crises keeps rolling along, and combined with too much milk (particularly from NZ) has seen dairy returns 'fall out of bed'.
At MyFarm we predict a weak start to the new financial year for dairy farmers with a relatively low opening advance rate (as many say, 'with a 5 infront of the milk price'). But we also predict strengthening milk prices as we go through the year and could well end up with a milk price with a '6 infront'. The basis of our projections are mapped out below but come down to two factors;
Dairy demand is growing around the world, particularly due to population growth and increasing wealth that results in changing diets.
Whilst dairy demand growth is widespread, the potential for massive growth just from China has been noted by the Australian-based Commonwealth Bank, the parent company for the ASB Bank here in New Zealand.
Fonterra celebrated its 10th birthday last year. Despite it having established itself as the major player in the international dairy trade an informal view is that the company has achieved at a 6/10 level for implementation of strategy and profit results.
The new strategy refresh, a summary of which is posted on this site http://www.myfarm.co.nz/newspg, along with an encouraging start from new CEO Theo Spierings is very inspiring, in my opinion.
Global Dairy Trade (gDT), an internet based dairy commodity auction system, runs twice per month. Originally established (and still owned) by Fonterra, the auction now also sells product from Australia, the USA and Europe.
Fonterra Co-operative Limited today announced an 18 per cent increase in its half year net profit after tax of $346 million, boosted by higher volumes and an improved performance by its Standard & Premium Ingredients business.
Other highlights compared to the same period last year include:
The weight of increased milk production from New Zealand, up by approximately 9% on last year, finally had an effect on globalDairyTrade in this morning's auction.
The auction itself was aiming to sell increased volume with the result that prices were down by 4.5%. Milk Protein Concentrate was down by 15% but the major product driving the milk price, whole milk powder was down by a more modest 2.6%.
The 15cent downward revision in milk price by Fonterra on Monday has been foreshadowed for the past few weeks. Simply put, the weight of extra NZ milk (production is up by more than 10%) has had a dampening effect on international prices despite encouraging new demand.
The balance between the cost of buying a dairy farm and how much it can earn is the best that Pastoral Dairy Investments chairman Malcolm Bailey says he can remember. Read the story here.
In today's Herald, Mark Lister of Craigs IP writes about Warren Buffett's latest letter to Berkshire Hathaway (BH)Investors. Buffett writes about the wisdom of investing in productive assets - assets that 'produce something' that people will be prepared to exchange produce or earnings for.
An investment fund wants to raise $75 million from investors to buy southern dairy farms - one of the first opportunities for mum and dad investors to get a stake in the dairy sector. Read full article here
A new dairy farm investor says charities have already expressed interest in investing in its new fund.
Pastoral Dairy Investments plans to buy between seven and 10 large dairy farms over the next 18 months, which it expects to generate pre-tax returns of 5 to 6%.
In Rabobank's "NZ Agriculture in Focus" January edition their summary statement is that:
"Globally dairy fundamentals remain solid despite economic and financial turmoil, which is likely to provide firm, but not spectacular, prices and profitability through 2012".
In 2012, dairy farmers are looking ahead to a year of lower debt, higher cashflows and much stronger profit margins than ever before. Read my forecast for 2012 and beyond, here.
On 15 December 2010 the globalDairyTrade trade-weighted product price was US$3690 per tonne. Amazingly. the corresponding period in 2011, December 20th, the average winning price was an almost identical $3688 per tonne.
From this point last year, dairy prices took off. By 1st of March prices had risen 30%. And although they feel back from here this was the impetus to lift the milk price to $7.60/kg milksolids last year.
Today's globalDairyTrade was down by 1.6% on the trade weighted index - individual products were winners and losers. Whole Milk Powder and Skim Milk Powder were down but AMF (Anhyrous Milk Fat) was up.
Although the pricing was down, gDT did continue with an upward sloping price curve; that is product for sale in June to August 2012 is selling for more than product supplied in February.
That's a sign that there is some strength with dairy commodity markets.
This comment is a bit 'tongue in cheek' - but it is interesting to note that whole milk powder prices are several hundred dollars a tonne higher this year than last year at the same point. Does this mean that our milk price will end up in the $7/kg milksolids range rather than the current $6.50/kg price.
Today's announcement of a 20 cent increase in Fonterra's forecast milk price (see copy of Sir Henry van der Heyden's email to suppliers below) has been coming for a while.
In fact commodity prices have been in recovery mode almost from the day that Fonterra revised the payout downwards by 45cents on October 22. Prices for wholemilk powder have firmed almost 10% since early October, so we have been expect this good news from Fonterra, which will add about 0.5% to farm returns. A good start to the festive season!
Over the past six weeks whole milk powder prices have been creeping up. Allthough the data referred to in the following chart is from Agrifax, and not this morning's global dairy trade, they do indicate that with some further price movements the Fonterra milk price might move back up to $6.60 to $6.70 per kilogram of milksolids. At these prices there are decent profits with dairying!
The following report was printed in today's Dominion Post and makes interesting reading. We often relate the growing demand for dairy to population growth and growing middle classes but most commentary doesn't include the additional demand to come from a growing elderly population. As pointed out in the article, maintaining muscle mass is important to health in the elderly - whilst exercise is important protein intake is also critical. As people get older their red meat consumption declines; dairy protein is very well placed to pick up the deficit.
This morning Radio New Zealand's Kevin Ikin interviewed me about a group of German investment funds, for whom we manage 12 farms in the Southland region.
Kevin was keen to guage current demand for our dairy invesments and what was attracting investors. My answer is access. If you want to benefit from the long term soft commodities boom, then owning farmland is your best option. You can listen the full interview here.
It's nice to get past the 2011 NZ government elections. And if I am honest, good to have the same government in place with relatively stable policy settings.
Today MyFarm 'came second' on the purchase of a good mid-Canterbury dairy farm. The process was a private treaty deadline sale, a.k.a. tender.
We normally avoid these competitive sales processes as often there is a lot of work required without a certain outcome. And that is what happened this morning when we were politely told there was another better offer.
Let's hope that the drama being played out in Europe doesn't find the shores of New Zealand. Although the issues seem remote from us, NZ is a heavily indebted economy and we are vulnerable to rising interest rates affecting solvency and economic growth.
Another well written piece by Dominion Post Farming editor Jon Morgan this week, featured some good friends of mine, who are excellent dairy farmers and managers of their staff.
The International Dairy Federation met this week in Parma, Italy. The IDF provides a forum for the dairy sector to meet and to discuss issues of mutual interest; promoting the health benefits of dairy, discussing and resolving technical issues and generally discussing areas of mutual interest.
The reasons why we think investors should look at our latest syndication, Opio Dairy, a 139 Ha Southland dairy conversion, is outlined in this short video;
At MyFarm we are mainly interested in the returns from investing in quality (and sustainable) dairy farms. But at the same time we recognise that farmer's relationship with the rest of NZ is important. Farming needs to co-exist with other land uses, including New Zealander's recreational needs.
The whole topic is complex, but part of the solution is education; that is people living in cities having a better appreciation of dairying and 'how it all works'.
This morning's globalDairyTrade event declined for the eighth straight time, with the average price US $3449/tonne. For details on the event as reported in Stuff, see;
But in a career of 20 years or more watching markets and announcements the good news tends to outweigh the bad. And there are some silver linings with recent downward movements in commodity prices;
The investment advisory sector hasn't always considered farming an obvious choice. As an investment, farming lacks liquidity - you can't ring someone and sell your stake tomorrow. And generally people look at average statistics and dismiss agriculture as an investment because annual yields are too low.
Rabobank continue to 'up the anti' with their projections of a supply / demand inbalance in favour of agricultural producers. They predict increasing prices and volatility through to 2020 and the requirement to increase agricultural productivity four-fold by 2050. NZ dairy farming, with our low cost pasture base is particularly suited to this outlook - we can still make profits at relatively low prices and the volatility will stop Northern Hemisphere producers ramping up production.
A repeat investor recently asked the MyFarm team to complete a review of his syndicate investments. He was particularly interested in how the investments were performing versus the MyFarm estimates in the original Memorandum’s of information.
We thought the results were interesting and worth sharing.
I was talking to a number of dairy farmers and professionals on Friday; we ended up discussing commodity prices, exchange rates and the outlook for the NZ dairy industry. We all agreed that the outlook is for some volatility in prices - not normally a good thing in business. But we came to a surprising conclusion; because the NZ dairy industry has so much in-built resilience volatility works in our favour.
The reason for this conclusion is based on a ratio; the ratio between the milk price farmers are receiving and the feed costs for producing that milk.
At MyFarm we mainly complete dairy syndicates and dairy farm investments. This has been because the outlook for dairy has been more positive, because the nature of NZ dairy has been more 'investment friendly' (e.g. stronger industry structure, better cashflow) and because there is more investor demand for dairy.
This is one of those times when the season is up and running but there's not much news on the commodity price or milk price front. The next global dairy trade will be held on the 20th of September and Fonterra announces its final result for 2010/11 on the 22nd. Good announcements are expected for both.
I really enjoyed reading this opinion piece in 'idealog' by Federated Farmers head of Dairy, Willy Leferink. He shares his (refreshing) view of NZ dairy farming, as a farmer, an immigrant and a shareholder in New Zealand's biggest company, Fonterra.
It will be a viewpoint many are exposed to for the first time. Recommended reading from me, click below.
Agri-fax's August Dairy Report was out today. This report is a summary of information on the (NZ) dairy industry that mixes information, statistics and forecasts in a useful monthly summary (Google "Agrifax" if you want more details, it is a chargeable report).
The report is pretty good reading - not every indicator is pointing in the same direction - but there is enough to give dairy farm investors encouragement.
In another reminder of why pasture is always best, futures contracts and transaction prices for feed in the USA have jumped again. According to the CME group;
Farm managers in pockets of Southland, Otago and Canterbury have had a tough week dealing with the polar blast - the snow that first hit Sunday was only just starting to disappear today. These images were snapped by one of our farm managers on a MyFarm dairy syndicate at south Otago on Thursday, after four days of snow.
On this farm the snow was as deep as 20 cm for much of the week and staff were flat out feeding out silage two or three times a day to cows during the day and checking calving cows three or four times a night to minimise losses.
Excellent business feature in today's NZ Herald about why investors are pouring into farmland in the US and parts of Europe. The profiles of former investment bankers and hedge-fund managers who switched to farm investment are fascinating, and their motives consistent.
Hedge-fund manager Stephen Diggleon on why he began buying farmland in 2008:
"Everyone said, 'Buy gold.' But at the end of the day, you can't eat it. If everything else goes and I just have these farms, it makes me moderately wealthy."
Farm managers and staff on our 7 dairy syndicates in Canterbury and 27 syndicates in Southland are flat out rescuing newborn calves and feeding out to cows during this week's 'polar blast'.
I heard the head of one of our (Australian owned) banks taking jokingly about Global Financial Crises 2 this week. No one thinks that is what has happened but financial markets were certainly "spooked" and further turmoil seems likely to occur.
As a (dairy) farm investment business we are acutely interested in how our investments will perform and whether or not there is demand for new product in the market.
In a televised interview on ABC Australia last week, renowned international investor and commodities expert, Jim Rogers said real assets and mining are the only place to invest right now.
According to the latest Tetra Pak Dairy Index report, 'we are entering a decade long dairy boom'. Some of the statistics will be familiar to readers but for an interesting take on the role of the middle class in increasing dairy consumption, see;
The following article is from Jacqueline Rowarth, Professor of Pastoral Agriculture, Massey University. Her article entitled "Why our future lies in NZ Food Inc" is sourced from; http://idealog.co.nz/blog/2011/07/why-our-future-lies-nz-food-inc?utm_source. To disclose, Professor Rowarth has spoken at several of MyFarm's conferences including our "Milk It" conference for contract milkers and sharemilkers last week. We might be biased but she certainly spea
Milk prices in the USA are rallying; Class III milk futures (manufacturing milk) have rallied, with JUL settling US57¢ higher at $19.69/hundred weight and AUG and SEP closing above US$19.00 cwt for the first time for some time.
The first of June is officially the start of the new dairy season and has come to be known as Gypsy day with hundreds of stock and people movements off and on dairy farms across New Zealand. Here at our Feilding head office we have 7 farm purchases settling today.
And by the end of this week there will be new faces on 18 MyFarm dairy syndicates - 4 in Canterbury and 14 in Southland. We're excited to be welcoming these high quality managers into the MyFarm fold - this is a dynamic and rewarding time to be a dairy farmer and a dairy investor.
For a comprehensive review of the outlook for commodities, I recommend Jeremy Grantham's latest quarterly letter: Time to Wake Up.
Although it's just one man’s view, Grantham is widely followed amongst fund managers and investment advisers and has a good reputation of getting more picks right than wrong. We suggest that you consult your independent advisors for your own information but this is one of a number of ‘well-reputed’ pundits picking a bull market for agriculture.
If the Labour Party is successful at November's election and follows through with its recent promise to bring forward the Emissions Trading Scheme, it will add additional cost of 1.7cents per kg of milk solids to the average dairy farm. Fonterra's fact sheet on the ETS explains that this cost will increase each year following the scheme's implementation:
For a somewhat amusing but never-the-less serious view on agriculture, see Jim Roger's comments on http://www.cnbc.com/id/42985646. "Get into farming and out of bonds".
International dairy prices held their ground at last night's globalDairyTrade online auction. The benchmark trade-weighted index dropped just 0.1% with Whole Milk Powder fetching prices 1.7% lower than 2 weeks ago but Skim Milk Powder up 2.8%.
The globalDairyTrade event this morning showed stable prices, with the index of goods sold showing an increase of 0.1% over the last auction. Product is currently selling at about 20% less than than the 1st of March 2011 auction but is still up by more than 6% on the average price for the season-to-date.
Interesting reading from the Reserve Bank about the economy, exchange rate and Commodity prices.
NEWS RELEASE
Date 12 April 2011
Export prices deliver benefits to economy
New Zealand’s agricultural export prices are likely to remain strong for some time, delivering benefits to the New Zealand economy, Reserve Bank Governor Alan Bollard said in a speech.
Strong international dairy markets mean 2010/11 is shaping up as one of Fonterra’s best years ever in terms of returns to its farmer shareholders. (Click here to see Fonterra press release)
gDT was down 8.2% last night as buyers shrank from paying the high prices of recent weeks. The question is, is this the end of the golden run (up 34% since mid December prior to this week) or is this a hiccup or rebalancing and related to the general turmoil in Japan and Libya?
Looking at the auction statistics is interesting;
Prices are down in the short term but are still relatively bullish in the Sept to Nov period (Skim milk powder even increasing).
Whether we like it or not at MyFarm, lack of liquidity is one drawback in investing in a farm syndicate. They are relatively easy to get in (though we would argue timing is important) but hard to get out of.
That's one of the reasons we focus on achieving liquidity for our investors; lives, objectives and opportunities change.
At MyFarm we have noticed a marked increase in farm buyer activity in the South Island since Fonterra’s Feb 22 payout increase. Earlier this week Dallas Lucas from Southland real estate agency, Southern Wide Real Estate, confirmed the market is heating up. Here's what he says:
We all know that the terrible events of this last Tuesday will have a lasting impact on the NZ economy. The following are some comments from the BNZ in their latest newsletter.
At MyFarm we are unequivocal; 2011 is an excellent time to invest in quality and growing NZ dairy farm businesses.
In a recent guest commentary I wrote for the NZX Agrifax Monthly Dairy Report I decided to tackle wider New Zealand’s often negative perceptions of the outlook for dairy farms such as:
Fonterra Chairman, Sir Henry van der Heyden emailed the cooperatives suppliers this afternoon to advise them of a further forecast payout increase, but also pass on his concern about today's massive earthquake in Canterbury;
From:Henry van der Heyden [mailto:Henry.vanderHeyden@mail.fonterra.com] Sent: Tuesday, 22 February 2011 3:24 p.m. To: Andrew Watters Subject: Farmer Update - 22 February 2011
In last week's National Business Review, editor in chief, Nevil Gibson talked about the prospects for food manufacturer, Goodman Fielder. While his piece, 'A procession of exhausted, good men' explores the trials and trevails of the company I was also interested in his inference that to take advantage of the food boom, you need to invest in a food company:
The January edition of National Geographic took a fascinating look at world population growth. The lead story Population 7 billion contains several staggering statistics.
For example, there will soon be 7 billion people on earth; projections are for numbers to reach 8-9 billion by 2050. By 2030, not that far away, the “global middle class” will reach 1 billion up from 400 billion in 2005.
Yesterday the NZ Herald suggested the property market was “not far off a floor” but lamented that high commodity prices and improved terms of trade were unlikely to be felt across the wider economy until farm values stabilised and improved.
A subdued NZ economy and a cautious Reserve Bank Governor sounds like lower interest rates for some time yet. But perhaps this outlook warrants a closer look.
With rain across most of the country and continued high dairy prices 2011 is a promising time for NZ dairy farmers. But it's not so rosy in the USA with the outlook "negative" as reported in the Daily Dairy Report.
"The Milk-Feed Ratio was back below 2.00 and profitability on the farm continued to slide
in December. Milk prices were lower and feed costs were higher, according to USDA’s
The rain that's falling this Sunday afternoon is across most of the country and is significant for two reasons.
The first reason, and of course the most important, is the effect on pasture and crop growth rates across the country. The droughts that have been declared in Northland and Waikato have come at a particularly vulnerable time for the dairy industry. There has been a few dry summers now and many dairy farmers looked as though they would miss out on the financial relief from a high milk price this year.
Syndication has been getting quite a bit of space on the website www.interest.co.nz recently. There is some concern about the market and its so called lack of regulation and liquidity. The debate is all good stuff other than the fact that there is a lack of balance to the writing.
We're writing to Bernard Hickey because he does refer to MyFarm and Peaks Dairy LLP, a syndicate that we are currently recommending for investment.
The title to this blog is stolen from 'sheepshagger' - an on-line participant in some news story discussion threads that I have seen. So, why is it 'off to the races' for dairy farmers at the moment.
I hesitate to refer to it because a lot of the comment is so negative, but an article on www.interest.co.nz/rural-news/farm-sales-slowest-years provides both a serious and funny side. Funny because of some of the comments;
"... this is a very unusual set of circumstances with record high prices and low interest rates and a falling market. Usually it would be off to the races at this point".
In a speech today Allan Bollard outlined his views on the world and NZ economy. The following quotes has been taken directly from his speech which can be seen in full on;
In an insert to the 2010 World Dairy Summit conference pack, Rabobank, a specialist agri-business lender, noted a structural shift in world dairy markets with their "Global dairy outlook - enter the giants".
Whilst there is a relationship between the payout and the US dollar exchange rate, the NZ dairy industry's highest payout was achieved in a year when the NZD appreciated to well over 80 cents USD. As of last week the NZD was again approaching these levels, calling into question both this year and next year's payout forecasts.
Of course this time around the NZD dollar strength is really being caused by USD weakness - which in turn is due to low interest rates and 'quantitative easing' or printing money that is again occurring
As farmers we make up a worryingly small percentage of the population. And as, over time, farms consolidate into more economic units, this situation gets worse. Perhaps one of the reasons why Dairy NZ has recently spent levy payer money on newspaper and television adverts promoting NZ dairying.
At some point, increasing prices does dampen customer demand as consumption of the product declines and manufacturers look for substitute products.
At present the Trade Weighted Index for the globalDairyTrade is at 1100 compared to a long term average of 900, but well below the 1500 that was reached in 2007/08.
Despite prices pushing some boundaries, product is still selling well - particularly fat-based products. The following two charts show strong USA cheese sales and butter inventories that are falling.
I've been 'banging on' on a similar theme for the last few months but the promise of higher world dairy prices and high costs for stall fed dairying is coming true - for now at least.
When the milk price goes up, production goes up. So goes the rule of thumb. But that only works provided costs are under control. In a favourite reference of mine, in a December 2008 Report Rabobank noted that 'those farmers that use inputs less intensively will be better placed for high operating margins'.
Fonterra hits top of forecast range of $6.60/kg MS milk price plus distributable profit
Payout to farmers (share backed) is 6.39/kgMS versus forecast range of $6.30 to $6.40/kgMS
When the 2009/10 season started the payout indication was $4.55/kgMS. Payout increases over the season have meant a $440,000 jump in income, compared to that initial seasons forecast of (for a commercial farm producing 240,000 kgMS).
As recently as the past day or so I have heard and read commentators say that they expect NZ milk production to rise by 8% this season and that we are "up by 5% already" for the season to date. The forecasts have relevance for dairy commodity markets given NZ's dominance, particularly during coming months. They also have relevance for activity on the globalDairyTrade sales platform.
In a recent survey Nomura group has rated NZ as the least vulnerable economy to rising food prices. Nomura, a Japanese bank, anticipates another multi-year rise in food prices following a surge between 2003 and 2008 fueled by the usual suspect of rising demand from developing economies (http://www.scribd.com/doc/37399421/Nomura-Global-Economics-Strategy-Sep2010).
The index looks at GDP per capita, the share of food out of total household consumption and net food exports.
Adding some supplementary feed can, under certain conditions, add to the profitability to our pastoral farming systems. Filling in feed deficits - periods when pasture growth is less than feed demand - and strategic supplementation can ensure that we take advantage of our cows genetic potential with significant increases in production and profit.
It always happens. The milk price increases and farmers increase production again. Part of this is inevitable – farm businesses don’t stand still and are always looking to increase output. When prices fall poorer cows are culled and costs on the margins are reduced. Milk production stagnates. When milk prices increase again cows are retained and spending flows. Milk production increases.
It's probably not that exciting but Michael Burry, a hedge fund manager and investor who predicted the latest recession is betting on farmland as one of the best future investments - see
Phones were ringing hot in the North Island as well as the South following the massive earthquake in Canterbury in the early hours of Saturday morning. Our thoughts were immediately with all affected but in particular the sharemilkers and managers on the four MyFarm supervised dairy farms near Dunsandal and Ashburton.
It seems that this weeks globalDairyTrade was driven up so strongly this week (index up 16.9%) because buyers are short of product. The Dairy Trader produced an interesting chart which shows the number of bidders and the number of unsuccessful bidders on the increase.
Yesterday was a sad day in many ways for the South Canterbury Region. At least most of the fallout has been constrained thanks to the Government's retail deposit guarantee scheme.
There are many others better qualified to debate the why's and how's; the purpose of this note is to consider the effect on the dairy market in the South Island.
Here is what we know about South Canterbury and related companies;
The final 2010/11 milk price is a long way away from being finalised but it is interesting to have an insight into the drivers of production and international prices.
The first thing to note is that dairy production volumes are falling in the Northern Hemisphere and stocks are quite tight. This is reflected by USA commodity futures which are higher for September than for any time this year.
It has become commonplace to say that dairy returns are volatile - "volatility has become the norm" I hear people say.
Certainly it is true that month on month dairy commodity prices seem volatile with the past 12 months a good case in point - with the past three or four months seeing a more than 20% fall in prices but from the second highest peak ever.
The August for globalDairyTrade occurs this week with results reported Wednesday morning NZ time. At MyFarm we are picking a relatively flat result with the milk price forecast of $6.60 to $6.70/kgMS to remain.
All information points to that fact that demand continues to be relatively strong, driven by the growing asian middle classes. The questions is what is happening with supply?
globalDairyTrade was down 13.7% this morning with all products, AMF, Whole Milk Powder and Skim Milk Powder down. According to van der Hayden of Fonterra the market has moved as a result of "increased supply".
With these prices speculation of a milk payout of $8/kgMS is out the window - but they were never realistic. One would expect that the outlook for the season will be defined in the coming two to three months - with relatively strong demand the GDT prices look to be value for money to us at MyFarm.
National Field Day attendance are up by 9% - at least over the early days of Mystery Creek. But in rubbing shoulders with other farmers it seemed to me that cheque books were firmly in the back pocket.
Farmers seemed to be catching up with service providers, seeking information but the stall holders I talked to hadn't had many firm commitments. I felt particularly sorry for irrigation and pump suppliers - they didn't seem to be attracting any clientele at all.
The ANZ commodity price index was reported yesterday and shows a 50% rise in world prices over the past 12 months and a 30% annual rise when measured in NZD. Eight of the 13 commodities were up last month including dairy, kiwifruit, wood pulp and lamb.
In general the rises reflect continuing strong growth amongst NZ's main trading partners for food products and raw materials.
The rises in dairy have been well publicised with strong forecast prices for the Fonterra milk price over the coming season.
globalDairyTrade results today were quite strong, though "down a bit" at minus 3.5% across the basket of products and contract periods. Whole Milk Powder was down a modest 3.4% with Skim Milk Powder taking a hit at minus 6.2% - possibly because of the EU decision to release some of its government stocks to the market.
There was a bit of "clumsy" in yesterday's payout announcement from Fonterra. They announced an advance price of $4.30/kgMS and a forecast milk price plus dividend (including possible retentions) of $6.90 to $7.10/kg milksolids.
During the boom (dairy) farm syndicates were the rage. Most were "do it yourself" syndications with friends, family and acquaintances via word of mouth becoming the investors. Sometimes these were assisted by bankers or accountants.
Anyone interested in buying a farm, investing in a farm or selling a farm is interested in what will happen to land prices over the next six months. At MyFarm we are interested too.
Probably the biggest feature of the past six months has been the lack of a market – farms haven’t been selling. It’s a tough time to be a real estate agent.
However, scratch below the surface, and some sales are occurring. Limiting the discussions to a dairying audience, there seem to have been three markets;
globalDairyTrade announced big increases in prices for whole milk powder traded through its on-line auction system on 6th of April. Whole Milk Powder lifted 21% to US$3950/tonne - a price not seen since the "food boom" of 2008.
This is great news for dairy farmers and investors considering dairy investments. Prices at these levels support a milk price in the range of $6.50 - $7.00/kgMS at which point most good dairy farms will be very profitable.
We've been talking to a lot of people interested in investing in NZ farms over the past few weeks. It's interesting to note that there seems to be a prevailing mood of "it will get worse before it gets better".
Although this is not shared by everyone, this approach of waiting on rather than acting on farm investment intentions is worth exploring.
It seems that dairy business failures are in the Media at the moment. Big Sky Dairy, Crafarms, Crafarms "Junior", McVitty are all examples. Does this signify that dairy is in trouble as a business enterprise?
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.
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...
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