New Zealand dairy farmers are likely to get a higher payout from milk processors next season as global output remains subdued while demand picks up in China, underpinning prices, according to agri banking specialist Rabobank.
The lender forecast a farmgate milk price near $6.25 per kilogram of milk solids for the upcoming 2017/18 season, ahead of Fonterra Cooperative Group's $6/kgMS forecast for the current 2016/17 season, it said in its recently released report titled 'New Zealand Dairy Sector - Out of the Woods'. Rabobank doesn't anticipate much upside to the farmgate milk price for the current season due to stronger than anticipated production from New Zealand, it said.
Global dairy prices have started to pick up this season as demand and supply come back into balance after record high prices in the 2013/14 season spurred farmers to ramp up production, causing an oversupply which led to two years of weak prices below the level required by most dairy farmers to break even. Despite the improved market balance, Rabobank said the possibility of further lifts to the current season farmgate milk price was limited.
"The price rally experienced since the second half of 2016 has had some of the gloss removed with stronger than anticipated production from New Zealand impacting on prices. As a result we don't envisage much upside to $6/kgMS for the final farmgate milk price for the 2016/17 season," said report author, Rabobank dairy analyst Emma Higgins.
However, Higgins said greater market balance was likely to ensure a favourable farmgate milk price for next season.
"Milk output around the globe continues to remain low. While the speed of decline in milk production is slowing, it will take until the latter half of 2017 for volumes available for export to increase. On the demand side, we expect a significant uptick in Chinese dairy import volumes across 2017 and this will help to underpin whole milk powder (WMP) markets," she said. "These dynamics are set to keep global supply and demand largely in balance and, assuming a spot currency rate, we forecast the global market is in line to deliver a farmgate milk price near $6.25/kgMS."
The report said a milk price in this ballpark would allow New Zealand dairy farmers to "emerge from the woods" after a two-year period of depressed commodity pricing.
Fonterra paid farmers $3.90/kgMS for the 2015/16 season and $4.40/kgMS for the 2014/15 season.
"Despite recent increases in farmgate milk prices, the cash-flow benefit has only just been realised in farmers' pockets due to lower early-season advance payment rates and another profitable season in 2017/18 is crucial to boost confidence in the sector," Higgins said. "Depending on cost structures, a milk price of $6.25kg/MS would be profitable for the majority of New Zealand farmers and would provide a second year of healthy farmer margins."
Farm inputs such as fertiliser and feed appear set to remain comparatively low, helping farm profitability, she said.
Still, risks remain to the more positive outlook, including the chance of increased milk supply out of Europe and currency shifts stemming from political uncertainties in Europe, she said.
The most significant upside to the bank's outlook was the possibility of a sharp increase in New Zealand dairy exports to China.
"Chinese production has been struggling to keep pace with our low consumption growth forecast of 1 percent and stock levels are now very low," Higgins said.
"We see import growth of 20 percent year-on-year as a possibility for 2017, which would barely restore inventory levels," she said. "New Zealand is well positioned to play a lead role in providing product to China, particularly so in the event that other large WMP-producing countries struggle to increase their output over 2017."
Dairy products are New Zealand's largest export commodity and Auckland-based Fonterra is the world's largest dairy exporter.
This article is tagged with the following keywords. Find out more about MyNBR Tags
Most listened to
- REAA CEO Kevin Lampen-Smith says the rules and regulations are adequate to ensure safety requirements are met
- Why good education trumps regulation for drone (UAV) use, with Airways' Tim Boyle
- Tim Hunter wonders how the subsidy system will cope when the fees-free policy kicks in
- Fat Prophets' Greg Smith discusses this week's highs and lows
- Matthew Hooton it's time the old faces departed National
- NBR Radio: The best interviews, with Grant Walker – updated daily