As New Zealand enters the off-season, data out of the global dairy trade leader has been anything but quiet. On June 9, the Ministry of Primary Industries (MPI) released its 2015 forecast, which revealed expectations for New Zealand’s 2015/16 season to produce 1.3% less milk than the 2014/15 season. The forecast cites a relatively strong performance during 2014/15 that could be difficult to repeat given poor pay price forecasts for the coming season. MPI is forecasting a revenue gain of 4.5% for the next season with much of the increase coming from higher price expectations. Additionally, MPI expects to see a much larger total revenue gain in the 2016/17 season, rising nearly 12% – suggesting a substantial rise in dairy products for late 2016 & early 2017. Continued urbanization and rising protein consumption per capita throughout China and Southeast Asia are driving these forecast gains.
At the end of May, Fonterra announced its initial pay price for the 2015/16 season at $5.25/kg. of milk solids. While the 2015/16 forecasted price is a 19% improvement from the current season, in equivalent U.S. class pricing milk solids (3.5% butterfat, 3.1% protein and 5.9% other solids) the New Zealand price would be $10.84/cwt., well below current CME milk futures estimates. On June 8, Class III and Class IV milk futures between June 2015 and May 2016 closed at $17.05 and $15.21; which is respectively and considerably higher than prices from New Zealand. This price outlook assumes a rising Global Dairy Trade (GDT) auction during the coming months-consistent with the MPI forecast. While China remains New Zealand’s top export partner, the forecast assumes that China either returns to the marketplace or that New Zealand will be able to continue to replace export volumes to other regions.
Replacing export volumes to China for a second consecutive year could be challenging for New Zealand without access to a large market- a market like Russia. As of late, the U.S. Dairy Export Council reported that New Zealand intends to send an envoy to Russia to discuss releasing the ban on 61 Kiwi plants that has been in place since the 2013 botulism scare. That said, should Fonterra desire to export to Russia, they’ll find that they already have some approved plants. Given the size of these facilities, it’s quite possible that New Zealand could consolidate volume to begin exporting products. A few months ago it seemed Russia could hardly afford Kiwi dairy products, however, improved oil prices and a stable ruble could make purchases possible at the onset of the new season.
Additionally, without Chinese purchases returning to trend, New Zealand may have to look at altering its product mix. At year end March 2015, whole milk powder (WMP) revenues accounted for 40.2% of total export revenue. Butter, anhydrous milk fat (AMF), and cream was the second largest category with 15.8% of total revenue and all other products accounting for the remaining 46%. China accounted for 29% of New Zealand’s WMP exports. While New Zealand successfully backfilled exports intended for China, continuing to rely on the United Arab Emirates, Algeria, and a wide variety of Southeast Asian countries could be difficult, if not impossible to repeat. Likely, if New Zealand were to export dairy products to Russia there could be a greater emphasis on cheese and butter, suggesting lower amounts of WMP, but with the potential for more skim milk powder (SMP) being available to markets. Gaining access to Russia and shifting product mix could indeed support MPI’s forecast for higher prices.
But the more interesting topic could be the potential for lower milk output in New Zealand. Simply, MPI expects higher cow numbers but lower milk solids per cow. Although New Zealand slaughter is running 24% higher than the prior season, through April, cow exports to China are well off pace. During the past year, China has signed several agreements with Uruguay, Argentina, and other nations to source cows, leaving the more expensive New Zealand cows at home. As a result, the historically high culling has had little impact on New Zealand’s potential milking herd for the 2015/16 season. In fact, MPI forecasts New Zealand’s milking herd to stand at 5.31 million head for next season, up 2.5% from the current season. However, MPI expects 2015/16 season milk solids to reach 1.833 million kilograms (kg), down 1.35% from this season. Some reports suggest New Zealand farms are reducing the intensity of dairying in the next season. Said another way, New Zealand dairy farms could reduce supplemental feed in order to cut costs during the second year of low milk prices. Without grains or palm kernel expeller (PKE) in the feed ration and relying more on pasture, cows will tend to produce lower components in the milk. Additionally, these cows could be more susceptible to adverse weather in dry conditions that affect the pastures. Poor pasture quality without supplemental feed could cause output per cow to decline. However, current conditions in New Zealand suggest pastures, for now, are in good shape for the start of the next season. At the very least, the latest MPI forecast has market watchers paying attention.