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?
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,...
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.
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.
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...
