Monday, 19 December 2016 07:10

A year many would rather forget

Written by  Global Impact John Droppert
A good hay season has buoyed spirits heading into summer. A good hay season has buoyed spirits heading into summer.

COMMENCING amidst brutally dry conditions in many regions, progressing through a farmgate price shock, generous servings of supply chain acrimony, and into a period of excessively wet conditions and thin-to-negative margins, 2016 is a year that many in the dairy industry will be keen to forget. 

As reported in this column last month, milk volumes are consequently down as well – around 10% for the season to October. 

There are, however, some positive signs as we enter the festive season and finally start to see hay being baled without the hassle of bogging machines every few laps.  

Firstly, feed prices continue to fall, with both grain and hay values continuing to slide.  

Water is also cheaper in irrigation regions - $100/ML may be a stretch for some given current operating margins, but it’s a long way ahead of $300/ML of a year ago!  

Secondly, the weather appears to be settling down, and there continues to be green grass in places that are usually long dry by now – and certainly were last year.  

This will help take some further heat out of feed costs.  

The third factor beginning to deliver some upside is the continued improvement in commodity prices.  

Global commodity prices have an influence well beyond the proportion of Australian production that is exported, through competition from imports, and domestic supply contracts pegged to international indicators.  

November was a month of further increases in commodity prices, with a mixed set of gains across the key product lines.  

New Zealand’s milk production numbers (down around 6% for October) look increasingly subdued, and sharply tighter Australian milk volumes are constricting local product availability.  

The sharpest pricing and biggest challenges around sourcing have been in the butterfat market, with many traders continuing to report that Australian butter is near (if not) impossible to procure.  

Pricing up to US$1,000-2,000/t above bulk commodity indicators is being reported in places as smaller domestic buyers scramble to shore up requirements.  

Reports of additional New Zealand imports and businesses buying product off retail shelves highlight the extent to which some are having to go.  

Australia is not alone in facing a butterfat squeeze, with strong butter prices a regular feature of the US market in recent times, and a number of export buyers caught short when European supplies have tightened sharply.  

No one cause has been singled out, but many point to consumer shifts back towards more ‘natural’, full-fat products at the retail level (evidenced in part by growth in butter and whole milk sales in Australia), and equivalent moves by food manufacturers and food service/takeaway players.  

The other mover recently has been whole milk powder, with prices firmer as enquiries tick along and other (non-China) markets reportedly show more interest (though how much interest remains a matter of debate).  

Lower New Zealand milk volumes are also going a long way to helping to support pricing up towards the mid US$3,000’s/t.  

China remains the dominant market however, and questions remain around the sustainability of this rally into the medium term if purchasing from others doesn’t pick up.  

Australian volumes are relatively limited in any case, with WMP pricing affecting the skim milk powder (SMP)/butter calculations as much as anything else. 

Prices for SMP itself continue to face pressure from US and European competition, though tighter supplies due to lower milk volumes have allowed many manufacturers to drive values up somewhat.  

The market faces some downward pressure (or expected pressure) from the imminent commencement of sales of European intervention stocks.  

Having said that, it is widely acknowledged that the age of the product being sold (over 12 months) will limit the extent to which it can undermine prices for fresh SMP. 

Cheese prices have increased in line with the broader market dynamics; the bi-annual Japan negotiations are still underway but reports suggest some further upside potential for cheddar. Cream cheese and mozzarella have also firmed significantly over the past month. 

The general market feeling is one of cautious bullishness, with milk supply contraction and some reduced buyer resistance helping this along internationally.  

In Australia, the more acute supply squeeze being felt by some is further amplifying this.  

Into the medium term however, enough downside pressure remains to suggest that runaway price increases are less likely than the current incremental rebalancing – but nonetheless, it’s a more positive situation than this time in 2015.  

There’s no denying things remain incredibly tight on farm, but it’s fair to say there is also some cause for Christmas cheer. 

More like this

While the industry makes headlines, the market turns

We're getting close to the peak of the production season in southern Australia, in one of the most tumultuous periods in the recent history of the industry. In the past 18 months, an unprecedented volume of milk has moved between major dairy companies in a short space of time, and most likely has some way to go yet, as the aftershocks of the major step-down in milk prices towards the end of the 2015-16 season continue to reverberate.

Situation & Outlook: World moves slowly

Dairy Australia’s latest Situation and Outlook report will be released tomorrow, during what’s shaping up as a period of recovery for the Australian dairy industry amidst a noisy corporate and policy environment.

More from this category

National Foods closes cheese sites

National Foods will sell its cheese processing plants in South Australia and close its two Victorian plants within three years.  The moves were announced as part of a $132 million investment in Tasmania, aimed at rationalising the company’s cheese making business.

NZ payout drop delivers a 'sobering blow'

NEW ZEALAND dairy farmers will be forced to make more hard decisions in the season ahead, as the country’s processors slash their forecast farm gate milk prices to well below the cost of production.

Milk processors want you

International demand and expansion in local processing facilities has fuelled renewed competition between Australian processors for southern milk supply.

Scramble for precious water in WA

SOME 2200 megalitres of water might seem only a drop in the ocean for flood weary farmers in northern and eastern Australia but in the drought-stricken west every bit of a new allocation will be precious.

Progression plan a work in progress

Unfortunately, many families can't broach the topic of succession planning at the kitchen table, so it was refreshing to hear WA farmer Peter Evans discussing his family's approach in front of 200 people.

Floods bring New Year chaos to northern dairy industry

THE QUEENSLAND dairy industry is starting 2011 in chaos, swamped by New Year floods engulfing the State.The big wet which drenched Central Queensland in December moved to the southeast corner of the State with devastating impact in the second week of January.

PRIME MINISTER Julia Gillard is deliberately misleading Australians by claiming she wants to keep the Murray-Darling reform process on time, according to Coalition Murray-Darling Basin spokesman Senator Simon Birmingham.

 

MURRAY GOULBURN has taken up all of its rights in takeover target Warrnambool Cheese & Butter Factory’s (WCBF) $48 million entitlement offer.

 

THE HEAD of one of the world’s largest dairy cooperative wants the industry to do more to promote the goodness of dairy.

MURRAY GOULBURN has increased its prices by 35c/kg for protein and 14c/kg for butterfat – or $5.25/kg for milksolids – backdated to July 1.

ALTHOUGH AREAS of northern Victoria may remain under water for months, the amount of damage wreaked by the state’s floods is slowly being assessed.

Leave a comment

Make sure you enter the (*) required information where indicated.\nBasic HTML code is allowed.

» Get social

When butter and chocolate collide

TWO New Zealand companies Lewis Road Creamery and Whittakers have teamed up to deliver what must be every dairy lover’s dream: chocolate butter.

» E-Newsletter

Subscribe to our mailing list

* indicates required