Insight
DECEMBER 2014 //
FROM THE GROUP CEO
Mixed forecast to agricultural season In a few short weeks the farming year is technically half way through, and it is proving both the best of times and the toughest of times this year. The best is coming in the weather. Most of the country has been blessed with some stunningly good days proving ideal for planting crops, getting lambs up to weight and making the most of grass growth for milk production. It could however be a case of making the most of the first half for farmers. Meteorologists are predicting a 67% chance of a “weak” El Nino weather pattern from late October onwards, with chances of it increasing over the later summer from January to March. The saving grace is the predicted weakness of the El Nino system and that it may not make itself fully felt until the last quarter of the season. For the country’s dairy farmers, the full effects of a down turn in the payout will be starting to bite towards the end of the calendar year, now the deferred payments from last season’s bumper $8.00-plus/kg milksolids payout have been deposited in accounts. Meantime this season’s costs will be requiring payments by the end of January, stretching farm overdrafts already challenged by a low advance payout of $4.00/kg milksolids. There appears little comfort to come from the lower dollar.
While the NZ dollar has weakened to its lowest point for the year in later September, it remains a long way from the Prime Minister’s preferred “Goldilocks” value of US65c. As great as the decline has been, it cannot buffer the major drop in global dairy prices which fell 48.5% from their peak in February. The positive side however to help offset the decline is the effect good weather through spring time had, pushing production about 3% up on the same period a year ago through October alone, and hopes for overall production to be up 3-4% for the season.
NZ recently reported on the significant lift in value that occurred with last season’s lamb crop, with the average per tonne value of lamb exports rising 13% to $8300 a tonne. Chinese demand appears to be remaining strong for this season, and expectations remain firm for $100-plus lambs, almost a necessity to deliver a close to reasonable return to sheep farmers. Beef prospects also appear firm for this season, buoyed by tight supplies globally for product, and a continuing surge in Chinese demand for beef, with expectations the market will continue to grow at a rate of 10% a year for at least the next three years.
That in itself also is a double edged sword. While higher production may help counter a small part of the decline in payout, it also contributes to a swelling global pool of milk. Just as New Zealand is experiencing a positive level of milk production growth, so too are most of our major trade competitors, with milk production volume up between 3–5% in the United States, United Kingdom and most of Europe this season. Problems of marketing dairy products are also compounded by the one year Russian food ban. Most dairy farmers will be tuned into the Global Dairy Trade (GDT) fortnightly auctions, and acutely aware that the average price needs to lift 30% by March before Fonterra’s predicted payout of $5.30/kg milk solids can be achieved. Without some positive price movements in the GDT index before Christmas, the revised forecasts put out by Westpac of $4.80/kg milk solids will appear an increasing reality.
The ability of larger beef producing companies to meet the demand is constrained, with US feed lot numbers low, and the Chinese market being closed to US producers. Meantime Australian farmers continue to struggle with drought inhibiting restocking rates, while Brazil is only just re-entering the Chinese market and also faces higher domestic demand for its beef. While a downturn in dairy payout may temper demand for arable crops, the level of supply against demand remains tight, helping keep tonnage values at a point that maintains profitability for arable farmers. The hope for all sectors is the slide in dairy payout will be corrected for the 2015-16 season, something that will become clearer in coming months.
Meantime prospects for sheep beef and arable farmers appear more optimistic. Beef + Lamb
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