Thursday, 23 June 2011 09:11

New Zealand farmers in box seat

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AS ANOTHER season draws to a close; milk prices come 'top of mind' as farmers assess how they've ended the year and put together operating plans and budgets for next season.

Where will milk prices end this current season? What will next season's opening price be?

Dairy Australia has recently published its annual Dairy 2011: Situation & Outlook report and estimates milk prices in southern regions will finish the 2010/11 season close to an average of $5-50 per kg milk solids.

It went on to say that opening prices announced by manufacturers should be stronger than last year, when there was less certainty about the strength of recovery in world prices.

Consequently, the outlook for indicative southern farmgate milk prices, based on current commodity price and exchange rate expectations, is for an opening price range of $4-60 to $4-90 per kg MS – up from $4-40 to $4-60 per kg MS in 2010.

This implies a full year, average price range between $5-10 and $5-50 per kg MS – similar to the current season.

Meanwhile, Fonterra NZ has also recently released their estimated payout for the current season and their opening price for next season – which started on June 1.

Excluding any profit retention and dividend payments, Fonterra's estimated full-year milk payout for the2010/11 production season is NZ$7-50 per kg MS; while their opening price for the 2011/12 season is NZ$6-75 per kg MS – reflecting an outlook for a higher exchange rate and potentially moderating commodity prices.

Nevertheless, this figure still represents Fonterra's highest ever opening price forecast to date.

So how do these two sets of milk prices compare?

Of course there are many reasons why milk prices will vary from year-to-year between the two countries. These include the different product mix across the major commodity products; the market mix between domestic and the various export markets; individual company's business models and management of currency exposure; and the level of competition for milk in each market.

For example, the following pie charts show how the export product mix differed between the two counties in 2010.

These charts show how New Zealand is highly reliant on WMP and butter/butter oil; while Australia's export product mix is skewed more toward cheese and SMP.

In the year just gone, international commodity prices for butter/butter oil increased at around twice the rate of increase in milk powder prices. Cheese prices also increased, but at a significantly lesser rate than the other key commodity exports – and cheese is Australia's most important export commodity.

Consequently, there is potential for quite significant variations in export returns between Australia and New Zealand and these variations will flow through to milk prices.

Another factor contributing to different milk prices is that there has been significant competition for milk supplies in southern Australia in recent years, while Fonterra NZ dominates its market.

After considering all these factors, there is every reason to expect milk prices to be quite different on each side of the Tasman.

Nevertheless, both sets of milk prices – once converted to nominal $A – broadly track the dairy commodity price cycles.

Peter Wilson is industry analyst for Dairy Australia and can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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