Once again the dairy industry is being portrayed as ‘white gold’. Fonterra have announced an initial projection for 2010/11 of $6.90-$7.10 per kg milksolids. MAF have also got on the bandwagon with the release of their latest SONZAF report, predicting a production increase this year of 14%. Their predicted milk price for 2011 (apparently excluding distributable profit) is only $5.60, but by 2014 they are predicting $7.21. As one farmer said to me today, and thinking back just two years to when sentiment went crazy: ‘Here we go again’.
Fifteen months ago I talked at some Dairy NZ seminars about short and long terms trends for dairy products. In the long term I saw:
– more people
– increasing living standards in Asia and maybe elsewhere
– non sustainable irrigation in many parts of the world
– crop yields only increasing slowly
– increasing land-use competition from bio-fuels
– increasing prices for food
– increasing prices of fuel and some other inputs.
In the short term I thought that:
– 2009 would be an aberration
– there would be sunshine out the other side, but there would also be further storms
– no-one could know how long the current storm would last
– countries such as Venezuela and Russia would no longer have the money to buy our products (until the price of oil went up again)
So what has changed in the meantime?
The long term trends still look valid, but what about the short term?
Some of the short term specifics have indeed moved on, and the recovery certainly came quicker than almost anyone expected. Venezuela dropped from first position as a dairy export destination to ninth position, and China came up from fourth to number one. But the big message remains the same: volatility has not gone away. At the moment there is sunshine (when it comes to dairy prices) but sometime there will almost certainly be future storms which could come out of any quarter.
Right now, I see the biggest short term threat to dairy prices coming from the USA. One of my dairy farmer friends, who has a keen eye for history, regularly tells me never to underestimate the incredible resourcefulness of American farmers. The American industry is close to five times the size of ours, and although we often read about farmers in economic stress, there is a major component of the American dairy industry which is very efficient.
Grain prices in America are the cheapest they have been for three years, with corn futures at just about $NZ210 per tonne. Other feeds are also at three year lows. So it makes sense for farmers on total mixed rations and similar to crank up the production again. As little as a 3% increase in American production could boost internationally traded product by about 12%.
Europe is also worth keeping an eye on. I think the euro is going to decline further relative to the $US dollar, and I can see parts of Europe where they might be soon able to compete effectively on the world market. But nothing is certain. Our New Zealand Treasury projections used by MAF in the SONZAF report are that the euro will actually strengthen.
Despite my enthusiasm for South America, I do not see too much new production coming out of there in the next two or three years, or at least not enough to destabilise prices. Just this week I was talking to someone from Argentina who is looking at some large scale developments. In Uruguay, NZFSU, despite failing once again to meet production targets, is still producing more milk year by year. But in the greater scheme of things these changes are miniscule. Brazil is another story, and should never be under-estimated. However, I think the future for Brazil may lie with agricultural industries other than dairy.
As for Australian production, that is going nowhere fast. Despite a wet autumn in many parts, lack of reliable water remains their Achilles heel.
On the demand side, China is, as always, the one to watch. But we should not forget the ASEAN countries, or the Middle East. And if oil prices rise sufficiently then Venezuela might be back as a major purchaser.
The other potential demand problem is that with dairy prices so high relative to crop prices, food processors may substitute away from dairy to non-dairy ingredients. This is particularly the case with fat based products, given that dairy fats are currently selling at amazing prices.
Putting all of this together into a simple statement as to where dairy prices are going over the next 12 to 24 months is not possible. I can easily draw scenarios for the coming season of a milk price of about $8 per kg milksolids, or possibly even more, based on current prices and exchange rates. However, I can also easily paint a picture of a final price of less than $6. I think it will be about November before we get a reasonable picture of the 2010/11 payout.
So for me, that means planning on less than $6 per kg milksolids, and then hopefully, perhaps even probably, being proven wrong. That is much better than planning on $8 and ending up with $6 or less.