Fonterra's forecast payout is down to $4.30 per kg of milk solids, well below the average break-even of $5.25. Photo / John Stone
Fonterra's forecast payout is down to $4.30 per kg of milk solids, well below the average break-even of $5.25. Photo / John Stone
The world's dairy trade is in the midst of "super" downcycle that will take time to work through, Rabobank's head of food and agribusiness research for Australia and New Zealand, Tim Hunt, said.
Hunt, in a speech to Dairy NZ's farmers forum at Mystery Creek, near Hamilton, said overproduction in the European Union after the lifting of quotas last year remained the biggest concern for the market globally.
He said the protracted downturn looked likely to extend into 2016/17 season but that pricing would "get substantially better" in the medium term. Hunt said the current downturn had surprised everyone with its duration.
Wholemilk powder prices, which are the key component of Fonterra's farmgate milk price, have been below the important US$3000 a tonne mark for the last 21 months.
In the previous downturn in 2012, prices were under US$3000 a tonne for just four months and in the 2008-9, it took 13 months for prices to claw their way back. Rabobank expects prices to average just US$2500 a tonne over the next months, against the last GlobalDairyTrade price of US$2176 a tonne.
While New Zealand farmers have been living with two seasons of very low prices, the current supply/demand imbalance had been slow to make its presence felt in offshore markets. However, Hunt said prices were starting to go into reverse in the Netherlands and Ireland, which should help redress the imbalance.
He said the sector faced a positive outlook in the medium term. "Dairy has had an unbelievably consistent track record in sustaining global demand - even now demand is rising," Hunt told the audience of nearly 800 farmers. "Going forward, that will be led by emerging markets and we believe that they will continue to struggle with that milk requirement," he said.
Free trade agreements were valuable, Hunt said, but they only went so far. "They can only achieve so much in difficult markets," he said.
"Despite having a free trade agreement with China, when things get difficult it's New Zealand that feels the pain in its supply base," Hunt said.
Dairy has had an unbelievably consistent track record in sustaining global demand - even now demand is rising. Going forward, that will be led by emerging markets and we believe that they will continue to struggle with that milk requirement.
Hunt said China's imports were stabilising and starting to rise.
In the US, which is enjoying a strong resurgence in domestic consumption, participants had been pulling back from world markets.
Hunt said the market was going through its third downturn since 2008. "It's important we all learn what we can from this one," he said.
"We expect this recovery to start kicking in the next production season," he said. In terms of lessons learned from the latest downturn, Hunt said it was sometimes "not enough" to be the lowest cost producer.
Looking back at the peak, when milk prices hit a record $8.40, Hunt said not enough New Zealand producers took the opportunity to reduce debt.
"We probably carried too much debt and costs going into this downturn," he said. DairyNZ has been on a campaign to advise farmers on how to get costs out of their systems, with a heavy emphasis on returning to a grass-based model.
Dairy NZ chairman and Fonterra director Michael Spaans told farmers that Dairy NZ was "emphathetc and we stand beside you". Farmers had already made big inroads into their costs. "We know what we need to do in executing that plan," he said. "We are at the bottom and dairy prices will get better."
Fonterra's farmgate milk price for the current season sits at $3.90 a kg of milksolids, against Dairy NZ's estimate of the average breakeven point of $5.25. The co-op will issue the first forecast for 2016/7 near the end of this month. Analysts expect to see a milk price around the mid $4 level.
