NZ dairying still 'in box seat'

Andrew Watters
Andrew Watters
It is too soon for doom and gloom to be cast over the New Zealand dairy industry, the executive director of MyFarm, New Zealand's largest farm investment company, Andrew Watters, says.

The outlook for the New Zealand dairy farming for this season and beyond was good, Mr Watters wrote in a report.

Recent predictions of the end of the good times were failing to take into account the long-term fundamentals.

''The fundamental drivers of good farm returns have not changed in the past few weeks. The fluctuation in milk prices between last season and this is just another example of the volatility New Zealand dairy farmers have to manage.''

Well-run dairy farms with moderate debt and clear business plans could still generate good levels of operating profit at payouts of $6.50 a kilogram of milk solids and above, he said.

Last week, Fonterra announced it was considering realigning its packing operations, in Waikato, to focus more on paediatric nutritionals. Up to 110 jobs could be lost from the operation which employs 330 people.

ASB Bank says a milk payout of sub-$6.20kg ms is possible.

Mr Watters acknowledged the average whole milk power price had fallen by 38% since February 18.

However, it was important to remember Fonterra sold only 35% of its product on GlobalDairyTrade auctions and volumes at recent auctions had been low.

The volume sold at the last auction represented just more than 1% of New Zealand's annual milk production, he said.

Reports from Goldman Sachs and the United States Department of Agriculture backed up his positive outlook for the long term and the new dairy season which started on Friday, he said.

Some of the report highlights quoted by Mr Watters included China's whole milk powder imports being 70% higher in the year to date than at the same time last year, and the recent falls in auction prices were generally expected to reverse once the stockpile had been used up.

Growing Chinese demand was not expected to diminish materially for at least the next five years.

''New Zealand will not be able to supply all the whole milk powder China needs, so prices will generally remain elevated as the result of this excess demand.''

At the current prices, it was profitable for the European Union and the United States to start processing whole milk powder for export.

But that would need to switch from their current export focus of skim milk powder and cheese.

Because New Zealand could not supply all of the whole milk powder China required, milk powder from the US and EU would have to fill the gap.

''The EU and US will only produce whole milk powder if it is above their costs of milk production, which are on average significantly higher than New Zealand's.

This means whole milk powder prices will have to be high enough to meet this on-farm cost and this, in turn, will underpin New Zealand farm-gate prices at this level this year and out into the future.''

Even if whole milk powder prices dropped by about 12% this year, this season's milk price would drop to $6.50 kg ms, on the current exchange rate with the US.

If the exchange rate dropped to US80c, as it was at the same time last year, the payout would drop to $7.20kg ms, he said.

Chinese milk production was not keeping pace with demand. That was not expected to change despite local milk supply growth.

It would also take time for EU and US competitors to increase their whole milk powder production and they would need to produce it at a competitive price to New Zealand.

''In the medium to long term, provided we continue to focus on productivity, we are in the box seat and there's little reason to be despondent.''

MyFarm has 47 dairy farms and sheep and beef farms under management across New Zealand with assets valued at a total of $550 million.