New Zealand's dairy fortunes slowly turn for the better: New products, more stable future earnings and a long climb back up
By Eric J. Brooks
Although harsh conditions persist in New Zealand's dairy industry, the country's dairy cattle sector finally sees light at the end of the tunnel with prices recovering and new product lines emerging.
Over the immediate term, H2 2016's drift into La Nina-like conditions brought about significantly improved rainfall and pastureland conditions.
Moreover, not only are markets recovering but newer, less commodified and more stable product lines are emerging.
Coinciding with a USDA-estimated 5.2% reduction in opening dairy cattle numbers over two years (from 5.17 million in 2015 to 4.95 million head at the start of 2017), this enabled farms to reduce commercial feed intake to minimal levels. Dairy New Zealand reports that use of imported palm kernel extract, corn-based silage and other feed grains fell by 36%, 12% and 27%, respectively. This had the effect of boosting milk production while minimising cost. 2016's resulting 21.3 million tonne milk output, while 3% below 2014 peak levels, was 1.9% more than the 20.9 million tonnes that had been projected.
The bad news is that with farmgate milk prices bottoming out more than 50% below their market peak earlier this year, most farmers are deeply in the red. Dairy New Zealand estimates that for 2016, dairy farmers will have suffered an average net loss of -NZ$1.31/kg (-US$0.96/kg) on the milk solids they produced. With an average farm herd's annual milk solid output amounting to 157,000kg/year, the average New Zealand dairy farm will suffer a whopping 2016 net loss of NZ$196,000 (US$143,000).
Most of the country's farmers covered losses by taking on bank debt and, naturally, some defaulted in the process. This has resulted in fewer farmers and a rising farm production scale. According to Dairy New Zealand, from 350 head at the turn of the decade, average dairy cattle herd size per farm rose to 390 by 2013 (before the market crashed) and is estimated at over 430 head for 2017.
Despite the industry's troubles, exports (which account for over 90% of output) did better than expected, thanks to new, emerging product lines. While the volume of dairy commodities that make up the bulk of earnings sagged, overall exports, led by fluid milk, rose 4%, from 3.15 million tonnes in 2015 to 3.27 million in 2016.
Though they make up a minor share of overall dairy trade, butter, cheese and anhydrous milk fat (AMF) also enjoyed an export surge of 4% to 6%. Whey shipments, meanwhile, rose by a tenth. And even though dairy powder has been losing more profitable product lines, market dynamics are slowly turning in its favour.
WMP exports have been below expectations at 1.315 million tonnes rather than the 1.36 million tonnes initially projected for 2016. This figure is 4.7% less than the 1.38 million tonnes exported in 2015 and 7.6% below the 1.423 million tonnes in 2014, when the market cycle peaked and turned. With much competition from EU producers, 2017 WMP exports will stay stagnant, falling another 0.8% to 1.305 million tonnes.
With almost all production exported, WMP output was also compromised, coming in at 1.325 million tonnes, significantly below 1.37 million tonnes initially expected. 2017 is expected to see slack output slumping further to 1.320 million tonnes. And while inventories are expected to close 2017 down 5% to 171,000 tonnes (from 180,000 at the start of the 2017), this will still be far above the 100,000 to 150,000 tonne WMP inventory levels usually seen during the dairy export boom years.
There was, however, good news on SMP exports, as they reached 430,000 tonnes rather than the 415,000 earlier projected. The problem is that most New Zealand dairy powder earnings are accounted for by slumping WMP, whose shipments usually exceed those of SMP by a factor of three. WMP has the lowest unit production costs of any New Zealand dairy product line. As exports shift from WMP to other dairy commodities, unit costs are higher and returns correspondingly lower.
Thus, even though SMP exports are about 10% above their pre-market crash peak, they are counterweighted by three factors. First, the fall in WMP exports outweighs the increase in SMP shipments. Second, even though SMP shipments have gone up by a tenth, with unit prices down by 35% to 50% below peak levels, earnings have fallen steeply over the past three years. Third, surging SMP export volumes from America, Australia and the EU is expected to cause 2017 SMP export volumes to slump back 10.5%, to 380,000 tonnes in 2017.
All this will wipe out any revenue gains from the slight increase in SMP market prices made over the past year.
The full article is published on the January - March 2017 issue of DAIRY BUSINESS WORLDWIDE. To read the full report, please email to email@example.com to request for a complimentary copy of the magazine, indicating your name, mailing address and title of the report.