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MONTHLY DAIRY

OCTOBER 2017

Dairy commodity markets 2

Milk production 7

Milk price 10

Dairy company share prices 12

Inside this issue

Susan Kilsby AgriHQ now expects no growth in NZ’s milk supply this season. Spring production has been poor due to the damage done to soils and pastures in the past few months when conditions were excessively

wet. Peak milk intakes are expected to be the lowest seen in recent years.

News that NZ’s milk supply is down seems to be falling on deaf ears as there is little urgency from buyers - aside from the Chinese - to secure product. The demand from China is more related to the low tariff window than due to fears of reduced supply.

As we are right at the seasonal peak in NZ’s milk supply there certainly isn’t any shortage of product right now, but in the coming months supply is expected to tighten. So far Fonterra has managed to find enough product to actually lift its whole milk powder (WMP) offerings on Global Dairy Trade so it is easy to see why buyers are not concerned about

immediate supply. Dairy markets in general have softened over the past

month on the back of solid growth in European milk. Prices for virtually all commodities have tracked down. This has brought butter pricing down from the dizzy heights seen earlier this year – although prices still remain high. Skim milk powder (SMP) prices dropped when the intervention scheme closed its buying for 2017. Rumours that the European Commission won’t be purchasing SMP next year at the standard fixed price have been bearish for this commodity.

WMP pricing has softened but is generally holding near the US$3,000/t level. This price level is not sufficient to reach the milk price Fonterra has forecast this season, although farmgate returns will be assisted by a lower NZ dollar. The NZ dollar fell sharply on the news that a left wing Labour, Greens, NZ First coalition will govern New Zealand for the next term.

Zero growth for NZ’s milk supply

NZ MILK PRODUCTION FORECAST2017-18

0%

AGRIHQ WMP PRICE (US$/TONNE)

3050

NZX WMP FUTURES NOVEMBER 2017(US$/TONNE)

2975

AGRIHQ MILK PRICE 2017-18(NZ$/KG MS)

6.36

Amy Castleton


MONTHLY DAIRY OCTOBER 2017 PAGE 2


Dairy commodity prices starting to slip

Dairy commodity prices are starting to slip back as European milk production has started to improve at an accelerated rate. Dairy commodity prices had been expected to remain largely stable until Christmas, so the price falls are a bit earlier than expected. However European milk supply has stepped up in recent months resulting in expectations that supply of commodities will also improve. Buyer demand has been holding for the short term, with many buying hand to mouth across the commodity complex. However buyers are tending to wait to see where prices go before purchasing too much for 2018 delivery.

From a NZ perspective the recent easing of whole milk powder (WMP) is not justified, as buyers appear to be taking no notice of the fact that NZ’s milk production is performing poorly through the critical spring months. However many forecasts are still for NZ’s milk supply to lift this season, so buyers seem to be confident of availability. Any tightening in the supply of WMP won’t be felt for a few months yet as we are presently at the seasonal peak in NZ’s milk supply.

The milkfat market does remain at elevated levels although butter prices have come down. Anhydrous milkfat (AMF) remains at just about record levels, but on a milkfat content basis it is still slightly underpriced relative to butter.

European butter slumpsEuropean butter prices have dropped about

US$1000/t over the past month. European butter has been very overpriced relative to other regions, but even with the step down to the current level of US$7200/t, European butter is expensive relative to Oceania or the US.

Butter prices in Oceania and the US have also eased, but to a much lesser degree. Oceania butter is now averaging around $5700/t, while US butter is around US$5200/t.

Fundamentals of the milkfat market are unchanged – that is, production is still down, and demand is strong, particularly at the consumer level.

Fat prices were expected to stay high until at least Christmas, after which European milk production would be heading towards its peak and thus more butter would be produced. The decline has therefore come a little earlier than expected. Expectations are that prices may nudge down a little further, but they are unlikely to drop right away due to the underlying demand.

Butter production is still not likely to increase much until early next year as the milk is still not available. European milk production is now starting to trend up against last year, but commodity production is still trending

US$ TONNE 23-Oct-17 25-Sep-17 24-Apr-17 24-Oct-16 26-Oct-15

Butter 5800 6100 4890 3980 3100Skim milk powder 1800 1950 2025 2300 2250Whole milk powder 3050 3125 3200 2860 2800Cheddar 4050 4100 3450 3475 3300Casein - Acid 7000 7300 7500 7200 6500AMF 6800 6750 5930 5100 3950Weighted average 3217 3322 3232 2961 2766

DAIRY COMMODITY MARKETS Buyers ignoring NZ milk production figures

Butter supply still shorthighlights

Results from auction – October 17, 2017

Contract Period Shipping Month

1 2 3 4 5 6 All Contracts

Nov Dec Jan Feb Mar Apr

AMF 7540 7053 6710 6648 6555 0 6841BMP 0 0 0 0 0 0 0BUTTER 6140 6075 5384 5385 5335 0 5736CHEDDAR 4200 4110 4079 4100 4175 0 4107LACTOSE 0 0 0 0 0 0 0REN CAS 5739 5544 5507 5700 6029 0 5612SMP 1860 1849 1752 1749 1758 0 1797WMP 3083 3071 2936 2923 2935 0 3014

GDT price index 1039

GDT prices averaged across all grades/specifications and suppliers

Source: AgriHQ

1000

2000

3000

4000

5000

6000

7000

8000

Aug 15 Feb 16 Aug 16 Feb 17 Aug 17

US$ pe

r Ton

ne

Source: AgriHQ

Dairy Commodity Prices

SMP WMP AMF

0.7

0.8

0.9

1

1.1

1.2

1.3


Source: AgriHQ

Product Mix Value Comparison

WMP/WMP SMP+Butter/WMP SMP+AMF/WMP




behind. European butter production was 1% down year on year in August, and it is still 6% behind year to date.

There is still plenty of demand for milkfats. Buyers are buying short, meaning they have a constant need for more product. Usually we would see buyers starting to pull out of the market once prices start to drop, as they wait for prices to come back further as sellers become more aggressive. This normally results in a sharp decline. However this is not happening this time around, so any further decline in price is likely to be steadier.

It’s expected that there will still be plenty of demand for product for immediate delivery. There is not a lot available so it’s unlikely that prices will crash.

The trend in consumption patterns towards more full-fat products has meant that the fat market has gone through a structural change. So while prices will come down, they are unlikely to come back to historical levels.

Butter prices have also eased in the US, but this market is much more domestically focused. CME futures prices indicate there will be a seasonal lift in butter prices, as would typically happen leading into the holiday period. US butter production was up 6% in August, but it is still down 2% year to date. The volume in storage has continued to drop indicating demand is outstripping supply. There was 5% less butter in storage at the end of September than at the same time last year. Milk production has been weaker on the west coast, where many of the butter churns are located, which is keeping supply in check.

Intervention still shaking the market

The fall in skim milk powder (SMP) prices at the October 17 Global Dairy Trade (GDT) event means that Oceania SMP is relatively

aligned with prices being achieved in other regions. The US is currently the most expensive source, though its non-fat dry milk is only priced about US$25/t higher than SMP from Oceania.

The European Commission run intervention scheme for SMP continues to spook the market. There has been suggestions that product will not be bought at a fixed price next year (that is, the scheme will go straight to tender), or that the fixed price will be lower than usual. The scheme usually allows for 109,000t of SMP to be bought in at €1698/t

WMP Futures US$ Open Interest

Nov 2017 2975 6596

Dec 2017 2920 7084

Jan 2018 2900 5163

Feb 2018 2900 3760

Mar 2018 2880 2745

Apr 2018 2895 1195

SMP Futures

Nov 2017 1750 1820

Dec 2017 1730 1281

Jan 2018 1760 1090

Feb 2018 1750 681

Mar 2018 1750 619

Apr 2018 1775 95

AMF Futures

Nov 2017 6350 173

Dec 2017 6100 284

Jan 2018 6000 210

Feb 2018 5980 242

Mar 2018 5900 127

Apr 2018 5870 60

Butter Futures

Nov 2017 5250 552

Dec 2017 5200 465

Jan 2018 5150 300

Feb 2018 5150 166

Mar 2018 5150 68

Apr 2018 5100 26

DAIRY COMMODITY MARKETS US butter stocks falling SMP prices alignedhigh

lights

1000

3000

5000

7000

Nov 2017 Dec 2017 Jan 2018 Feb 2018 Mar 2018 Apr 2018US$ pe

r Ton

ne

Source: NZX Data

NZX Dairy Futures - forward price curves

WMP Futures SMP Futures AMF Futures Butter Futures

0

20000

40000

Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17

Tonn

es

Source: NZX Data

NZX Dairy Derivatives monthly trading volumes

WMP Futures SMP Futures AMF Futures WMP Options Butter Futures




(about US$2000/t) between 1 March and 30 September each year.

There is also still no indication yet of what is to happen to the SMP that has been stockpiled through the intervention scheme over the past two years. The Commission does continue to run monthly tenders. At the October 17 tender, there was 40t of SMP sold at €1441/t (US$1700/t), which was the maximum price offered. The prices offered have become increasingly more aggressive. This is the lowest price that the Commission has accepted for this product to date.

SMP prices are expected to move very little over the next few months. The NZX Dairy Derivatives market has the November SMP futures contract priced at US$1750/t, and expects SMP to fall to a low of US$1730/t in December and then see some recovery. The EEX and CME both have SMP futures priced at similarly low levels, but both also expect SMP prices to begin recovering earlier than the NZ market does.

WMP set to fall below US$3000/t?

WMP prices have been seen as relatively steady, despite the falls in WMP prices on GDT this month. However this may soon end, with the NZX Dairy Derivatives market suggesting that the drop in WMP prices will accelerate. The US$2975/t that the November WMP futures contract was at yesterday suggests a 3% fall is in store for WMP prices at the first November GDT event – though that is still around two weeks away. The Derivatives market expects WMP to ease to US$2880/t by March.

Demand from China for WMP has been steady. Import figures have been lifting against year-ago levels since June.

September imports rocketed up 242% to 24,641t, which follows an increase in August of 92%. In September there was a 242% lift in the volume of WMP China imported from NZ, but it also imported more WMP from Australia, the US and Europe. Year to date, China has imported 15% more WMP than it did last year, with 398,092t imported.

Chinese buyers will be currently importing to land product in January, whilst the lower tariff rate applies. The 2018 rate for milk powders from NZ is 0.8% up to a safeguard level of 154,745t.

The 2017 rate was 1.7% up to a safeguard level of 147,326t. Once the safeguard level is reached the standard tariff of 10% applies. From 2019, the tariff rate drops away to zero, but a safeguard does still apply until 2024.

China has apparently not bought all they need just yet, so there should still be some demand from this region for the next little while.

Other regions that typically buy WMP have been buying more hand-to-mouth. There

DAIRY COMMODITY MARKETS Intervention smp sold at €1441/t China WMP imports up 242% in

Septemberhighlights

0

1000

2000

3000

4000

5000

6000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecSource: AgriHQ

Whole milk powder prices - US$ per tonne

2014

2015

2016

2017

0

50

100

150

200

250

Aug 16 Oct 16 Dec 16 Feb 17 Apr 17 Jun 17 Aug 17

Thou

sand

Ton

nes

Source: GTIS

Whole milk powder exports (main exporting countries)

Argentina

Australia

United States

EU 28

New Zealand

0255075

100125150175200225

Jul 16 Oct 16 Jan 17 Apr 17 Jul 17

Thou

sand

Ton

nes

Source: Statistics NZ

New Zealand whole milk powder exportsOther

Africa

Middle East

China & Hong Kong

Asia (Excl China & HK)

Total Last Year

020406080100120140

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Thou

sand

Ton

nes

Source: China Customs

China whole milk powder imports

2015

2016

2017




0

1000

2000

3000

4000

5000

6000


Skim milk powder prices - US$ per tonne

2014

2015

2016

2017

does seem to be expectations from buyers that they will be able to get hold of WMP when they need it, despite NZ milk production dropping back in the early part of the season. Fonterra has lifted its GDT offer volumes of WMP for the events through to early December, which will be helping to support this view.

One of the other unknowns in the WMP market is how much may come out of Latin America. Latin America did win the majority of the most recent tender from the Algerian government.

Milk production is now improving in this region against last year’s poor performance, and Latin America would typically export more WMP in this situation.

However this is yet to show in export figures. Year to date, Uruguay’s WMP exports are still 37% behind last year, driven by falls in volumes to Brazil and Algeria. It has exported 164% more WMP to Russia. Brazil is even further behind, with year to date volumes down 75% on last year. Venezuela still accounts for 98% of Brazil’s WMP exports, but the volume that Brazil has sent to Venezuela has dropped 75%, and there is very little being sent anywhere else.

Cheese remains steadfastCheese prices have been reasonably steady.

GDT prices have remained close to US$4100/t. European prices are about US$100/t above this, while the US remains the cheapest source for this commodity as well, at US$3700/t.

European cheese production was 1% behind year ago levels in August, and remains down 1% year to date as well. EU cheese exports are up 6.8% year to date, with jumps in volume to Japan, South Korea, and Chile. A little more has also gone to the US. There was very little cheese in storage in the EU at the end of August, so it’s likely cheese is now running a bit short in this region.

The situation is quite different in the US. Cheese production continues to grow, with 3% more produced year to date. At the end of August, there was 6% more cheese in storage than at the same time last year, though the current volume is down a little from the record that was reached in July.

There is a belief within the US that any extra cheese produced can simply be exported when necessary, particularly because the US is the cheapest source for this commodity at present. Processors have also been happy to sit on cheese stocks until they are able to sell them.

So there is very little concern about the volume of cheese that is in storage and processors are happy to keep producing more. Prices have therefore remained steady in this market and are not expected to shift much.

US cheese exports have lifted 23% year to date. Larger volumes have gone to Mexico, South Korea, Japan and Australia.

DAIRY COMMODITY MARKETS

South America exports still well behind

US keeps making more cheesehighlights

0255075100125150175200


Thousand Tonnes

Source: GTIS

Skim milk powder exports (main exporting countries)

Argentina

Australia

United States

EU 28

New Zealand

010203040506070

Aug 16 Nov 16 Feb 17 May 17 Aug 17

Thou

sand

Ton

nes

Source: Statistics NZ

New Zealand skim milk powder exportsOther

Africa

Middle East

China & Hong Kong

Asia (Excl China & HK)

Total Last Year

0

100

200

300

400

500

Sep 15 Mar 16 Sep 16 Mar 17 Sep 17

Thou

sand

Ton

nes

Sources: USDA, EC

Skim milk powder in storage

EU Private

EU Public

US




2000

3000

4000

5000

6000

7000

8000


Butter & anhydrous milkfat prices - US$ per tonne

Butter 2016

Butter 2017

AMF 2016

AMF 2017

Japan is one of the world’s largest importers of cheese, usually only surpassed by the United Kingdom. While US exports of cheese to Japan are up 22% year to date, this seems to be a recent jump, as Japan’s import figures show that cheese imports from the US are down 4.8% year to date (both sets of figures to August). Its imports from Australia – which normally supplies about a third of Japan’s cheese imports – have also fallen, by 4.4%. However Japan has imported a little more cheese from New Zealand (+0.5%) and from Europe (+19%).

Whey follows cheese but lactose weaker

Whey prices have also remained fairly steady. US whey has been priced at just over US$900/t since mid-September. The CME market does expect US whey to decline, however, with the nearest dated contract for whey at US$860/t – unsurprising given the volume of cheese the US is producing. European whey prices have come back by about US$100/t since mid-September and are currently averaging US$789/t.

Lactose is struggling more than whey as competition has become more aggressive. Prices for lactose have not been published at the last two GDT events as what was sold went at the starting price. At the end of September, lactose was trading at US$759/t on GDT. Processors are finding that prices are now closer to US$500/t. US lactose prices have fallen to US$579/t, from US$650/t in mid-September. GDT’s new multi-seller lactose pool is due to start at the December 5 event, which should help to provide more price transparency for this commodity.

DAIRY COMMODITY MARKETS

US exports more cheese to Japan Lactose prices fallinghighlights

05

101520253035


Thou

sand

Ton

nes

Source: GTIS

Anhydrous milkfat exports (main exporting countries)

Argentina

Australia

United States

EU 28

New Zealand

0

10

20

30

40

50

Aug 16 Nov 16 Feb 17 May 17 Aug 17

Thousand Tonnes

Source: GTIS

Butter exports (main exporting countries)

Argentina

Australia

United States

EU 28

New Zealand

020406080100120140160


Tthousand Tonnes

Sources: USDA, EC

Butter in storage

EU Private

US




-1000

-500

0

500

1000

1500

2000

Dec 13 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17Th

ousand

Ton

nes

Year on year change: key exporting regions

Total

NZ

Australia

US

EU

Sources: DCANZ, Dairy Australia, USDA, Eurostat,

European milk continues to be the key focus of dairy markets, as production is now starting to accelerate. August production was up a sizeable 3.1% with further increases through the remainder of the year expected – with growth likely to persist through to Europe’s peak in May.

Southern Hemisphere production is usually of most importance at this time year, particularly as NZ is going through its peak production months. However the commodities market does not seem to be taking a lot of notice of the figures that are coming out. NZ tracked behind last year in August and September, driven by ongoing wet conditions.

Fonterra was down 2.1% in September and total NZ milk intakes were down 1.3%. Australian production is looking better – up 1.6% season to date – though August was flat on last year. The latter half of 2016 was weak for Australia compared to 2015 levels, so while milk production is now showing an increase against year-ago levels, it is not back to more average levels yet.

South American production is looking considerably more positive. Brazil is up 4% year to date (to June) while Uruguay is up 8% year to date (to August). Argentina is still tracking 7% behind last year however (year to September). Like Australia, the Brazil and Uruguay figures are against low levels recorded in 2016, but it does bode well for improved milk supply from the region.

Meanwhile growth in milk has slowed in the US, but growth of nearly 2% is still expected for the full year. American farmers seem to be happy to continue to produce more.

EU milk acceleratingEuropean milk grew 3.1% in August,

making for six consecutive months of increases. This brings Europe to +0.2% year to date. The European Commission has been forecasting 0.6% growth for Europe this year, which is now looking quite achievable. Production in Germany and France finally turned around in August. German production was up 0.9%, while French production was up 0.6%. This is the first month in which both countries have posted an increase this year. Production was down 1.7% in the Netherlands. Mid-size producers have also continued to increase their milk supply, including Poland (+5.1%), Italy (+13.2%) and Ireland (+11.2%).

Growth is expected to continue to accelerate particularly during the later months of this year. A year ago European

MILK PRODUCTION - GLOBAL AND EUROPE NZ production trailing behind Uruguay production up 8% year

to datehighlights

Europe the focus of global milk supply

farmers were being subsidised to cut production so growth rates will look very favourable when compared to year ago figures. European milk prices do support continued growth. The average EU price is estimated at €35.82/100kg of milk for September. This compares to a price of €27.81/100kg of milk in September 2016.

FrieslandCampina’s guaranteed price for October is €41.75/100kg. The company has recently called on Dutch farmers not to produce more phosphate than is covered by the phosphate rights of each dairy farm and to spread milk supply throughout the year as much as possible. A survey run by

the company in August suggested that the number of phosphate rights that farmers aspire to take over is much higher than what is actually available, and that they intend to increase the number of milk producing cows. FrieslandCampina says it has sufficient processing capacity to process all the milk it is supplied, assuming members stay at or below the statutory level of the phosphate rights system. It appears that Dutch farmers will need to wind their milking cow numbers back further to remain within their phosphate limits. The new phosphate rights system for dairy cattle in the Netherlands starts from 1 January 2018.

10000

11000

12000

13000

14000

15000


Thousand Tonnes

Source: Eurostat, AgriHQ

EU milk production -monthly

2015

2016

2017

-1000

-500

0

500

1000

1500

Feb 16 Aug 16 Feb 17 Aug 17

Thou

sand

Ton

nes

EU Year on year change in milk production

Ireland

Poland

UK

Netherlands

France

Germany

EU

Source: Eurostat




US sees slower growth in September

Growth in US milk production slowed in September. September output was up just 1.1% year on year, which follows growth closer to 2% in July and August. Milk production dropped sharply in California –down 3.4% – and production was not strong enough in other large milk producing states to outweigh this drop. Wisconsin was up just 0.8% and Idaho grew 0.2%. Milk was down 0.4% in New York.

Late September was hot, which affected milk per cow. Milk yields were up just 0.3%. Feed quality is also becoming an issue. Weather has been affecting harvest progress for both wheat and corn. In USDA reports, quality of corn has held up, although it has been slower to mature than usual. Quality of spring wheat has been poor for most of the harvest period, however.

While September was weaker than expected, the USDA has raised its forecast for 2017 milk production from +1.7% to +1.8%. Milk per cow is expected to improve, although cow numbers are forecast to be a little lower. Production is expected to grow another 1.9% in 2018.

Year to date, production is up 1.5% for 2017. US milk would need to grow at 1.8% over the remaining quarter of the year to reach the full year forecast.

US milk prices have slipped a little, which will be putting a bit more pressure on margins. However they are still at reasonable levels, and the price of feed remains comparatively cheap, so this is unlikely to have too much of an effect on output.

Slow recovery for Australian milk

Australia’s milk supply is slowly starting to recover, as reasonable weather and good input costs support higher milk prices this season. August production was flat against last year, bringing total season production to an increase of 1.6%.

The increases for the season so far do compare against a relatively low base, as production had dropped considerably at this time last year. August 2016 production was down 9.1% on August 2015 and July 2016 production was down 10.1%. So while production for the 2017-18 season is up against last year, it remains well behind 2015 levels.

Winter was one of the driest on record for the country. This was felt more in the west of the country, and has resulted in estimates of lower crop production this season. This saw grain prices rally, though they remain slightly behind historical levels. Water storage levels

MILK PRODUCTION – UNITED STATES AND AUSTRALIA high

lights

are still reasonably good, but some systems are starting to track behind last year.

Dairy Australia continues to forecast growth of between 2 and 3% for Australia this season. It expects growth to come more from southern regions, which tend to be more export focused. Those in domestic focused regions have been impacted more by weather and have had more of

a squeeze on profitability. There are risks to the anticipated growth this season. Confidence is still low for many Australian farmers, particularly because the fate of Murray Goulburn still hangs in the balance. Cashflows remain tight due to last season’s low milk price. There is a smaller herd, and there is potential for weather to impact farms and input costs to rise.

California production drops again

Australian growth to come from southern regions

60006400680072007600800084008800


Thou

sand

Ton

nes

Source: USDA

US milk production -monthly

2015

2016

2017

101112131415161718

Jun 15

Aug 15

Oct 15

Dec 15

Feb 16

Apr 1

6Jun 16

Aug 16

Oct 16

Dec 16

Feb 17

Apr 1

7Jun 17

Aug 17

Oct 17

Dec 17

Feb 18

Apr 1

8

Source: AgriHQ

US farmgate milk prices

Class III

Class IV

500600700800900

100011001200


Thou

sand

Ton

nes

Source: Dairy Australia

Australian milk production -monthly

2015

2016

2017




Milk production behind during peak

1.3% behind year-ago levels. We have now experienced three seasons in a row where milk intakes during September have been below par. Milk intakes during September and October this year are expected to be the lowest recorded since 2012.

The AgriHQ milk production forecast for the 2017-18 season (12 months to 31 May 2018) has been revised down further. We now expect no growth in milk supply this season. Our previous forecast was growth of 1.5%.

Milk production is expected to be down on last year during the peak production month of October.

This is significant as it is the largest milk producing month of the season. Milk production lost during the spring is typically difficult to catch up later in the season, but not impossible, as proven in the 2016-17 season.

Milk intakes in June and July were up on last season but winter milk volumes are insignificant. Spring milk intakes (August to October) are estimated to be down 1% across the three months.

Milk production during the summer months is expected to benefit from the high soil moisture levels which still persist across NZ.

But the final three months of the milk production season – March to May – are expected to be weaker than last season. The autumn of 2017 was exceptional due to fantastic conditions for pasture production. It is highly unlikely that these conditions will be repeated again in 2018.

The wetter west coast regions of New Zealand are only just starting to recover from the excess rain which fell persistently from late July through to early October.

Most areas have received below normal rainfall over the past fortnight which has allowed excess moisture to drain away. Most dairying regions have still received somewhere between 50mm and 150mm of rain in October.

This means soils are still wetter than normal in the main dairy regions.

During the very wet period farmers used what options they had available to them to offset the poor pasture production but it was a bit like ‘swimming against the tide’ on many farms.

Supplementary feed has been brought in to offset the slow pasture growth but many farms don’t have the facilities or finances for supplementary feed to make up a large portion of the cows diet.

As a result of the short-term demand from the dairy industry the supplementary feed market is now quite tight. Demand for

MILK PRODUCTION – NEW ZEALANDAgriHQ now forecasting no growth

highlights

most feed types has been strong with dairy farmers keen to get their hands on anything that can be delivered immediately. However there is still a reluctance from dairy farmers to lock into forward contracts for grain which is currently being planted.

Price expectations tend to differ between growers and buyers. Growers are hoping that higher farmgate milk prices will mean more spending from dairy farmers.

But dairy farmers remain cautious as the financial bruising they received during the dairy downturn is still fresh in their minds.

Caution is warranted given the outlook for this season’s milk price is not quite as rosy as it looked a couple of months ago.

Any rain that falls from November onwards will generally be welcomed by farmers as this will bolster soil moisture levels before we move into the dry summer period.

This is particularly the case on the drier east coast regions and the hotter northern regions.

The traditional west coast dairying regions typically receive good levels of rainfall all year round.

October expected to be worst in five years

0500

100015002000250030003500


Thou

sand

Ton

nes

Source: DCANZ

NZ monthly milk production

2015

2016

2017

0.0

0.2

0.4

0.6

0.8

1.0


Source: NZX Data

NZX Pasture Growth Index

10-yr Ave 2015 2016 2017 Forecast

0

10

20

30

40

50

60

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

thou

sand

hea

d

Source: NZX Data

NZ weekly cow kill includes dairy and beef cows

5yr average

2015-16

2016-17

2017-18




MILK PRICE – NEW ZEALANDSeptember 2018 milk price futures $6.40/kg MS

highlights

Milk price predictors

Milk Price Futures

2017-18% change f rom spot price

NZD/USD EXCHANGE RATE

0.620 0.670 0.720 0.770 0.820

USD per tonne FOB

2590 -24% 5.80 5.20 4.70 4.25 3.85

2780 -19% 6.40 5.75 5.20 4.75 4.30

2990 -13% 7.00 6.35 5.75 5.25 4.80

3217 -6% 7.70 7.00 6.36 5.80 5.30

3440 0% 8.40 7.60 6.95 6.35 5.85

3680 7% 9.10 8.30 7.55 6.95 6.40

3940 15% 9.90 9.00 8.25 7.55 7.00

2018-19% change f rom spot price


0.620 0.670 0.720 0.770 0.820

USD per tonne FOB

2190 -36% 4.60 4.10 3.65 3.30 2.95

2430 -29% 5.30 4.75 4.30 3.85 3.50

2700 -21% 6.15 5.50 5.00 4.55 4.10

3000 -12% 7.05 6.35 5.80 5.25 4.80

3300 -4% 7.95 7.20 6.55 6.00 5.50

3630 6% 8.95 8.15 7.45 6.80 6.25

3990 17% 10.05 9.15 8.35 7.70 7.10

2019-20

Outlook for WMP deteriorating

Contract Price

($/kgMS)

Open

Interest

(lots)

Sep-18 (2017-18 season) 6.40 3994Sep-19 (2018-19 season) 6.25 10Sep-20 (2019-20 season) 6.35 0

Note: 1 lot 6,000kg MS

% change f rom spot price


0.610 0.660 0.710 0.760 0.810

USD per tonne FOB

2260 -34% 4.80 4.30 3.85 3.45 3.10

2510 -27% 5.55 5.00 4.50 4.05 3.70

2790 -19% 6.40 5.75 5.20 4.75 4.35

3100 -9% 7.35 6.65 6.15 5.50 5.05

3410 0% 8.30 7.50 6.85 6.25 5.75

3750 10% 9.35 8.50 7.75 7.10 6.55

4130 21% 10.50 9.55 8.75 8.05 7.40

AgriHQ forecast drops to $6.36/kg MS

The AgriHQ farmgate milk price forecast for the 2017-18 season is currently 39 cents behind Fonterra’s forecast, which remains at $6.75/kg of milksolids (MS).

The current AgriHQ forecast of $6.36/kg MS is down 9c from where it was a month ago, though our forecast had lifted to $6.60/kg MS in early October before dropping away again.

The outlook for commodity prices has fallen right away recently, following two weak results at GDT.

Regular grade WMP to ship in December did actually manage to lift 1.5% at the October 17 GDT event, despite a 0.5% fall in the overall WMP price index.

However, WMP futures prices have been weakening over the last few weeks, and have weakened even further since the last GDT event. The November WMP futures contract settled at US$2975/t yesterday, and has traded down to US$2950/t this morning. This contract was priced at US$3170/t a month ago.

The Derivatives market expects WMP to fall to around US$2900/t by early next year. If this is realised in the physical market, milk price forecasts will certainly be under pressure from current levels.

Outlooks for other dairy commodities have also weakened. While butter, AMF and SMP are less key to NZ milk prices than WMP, weaker prices for these commodities will also be negatively impacting milk price forecasts.

Processors have maintained their forecasts for now. However if commodity prices do not improve, downwards revisions will become more likely.

The NZD:USD exchange rate has depreciated, following the announcement of a Labour-NZ First-Greens coalition government for the next term. The spot exchange rate is currently NZ$0.6875 to the US dollar. While Fonterra has already hedged much of its currency needs for the 2017-18 season, this lower rate is promising for any product yet to be hedged.

The AgriHQ forecast for the 2018-19 season has also fallen right away. This forecast has fallen 40c to $5.80/kg MS, also on a weaker outlook for commodity prices.

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

3

4

5

6

7

8

Jun 17 Aug 17 Oct 17

Ope

n Interest ('oo

o lots)

1 lot =

6,000

kg M

S

Milk pric

e ($/kg MS)

Source: AgriHQ

NZX Milk Price Futures

Open interest (Sep18) Open interest (Sep19)Sep-18 Sep-19




MILK PRICE – NEW ZEALAND

AgriHQ 2018-19 forecast $5.80/kg MS

Exchange rates providing supporthighlights

Foreign exchange rate forecasts

Farmgate milk price forecast $/kg MS 2016-17 2017-18

Fonterra (plus 40c dividend) 6.12 6.75Westland Milk Products 5.18 6.40-6.80Open Country Dairy 6-6.10 6.25 - 6.55Tatua 7.10Synlait 6.16 6.50Oceania (Fonterra + 17c for 2017-18) 6.22 6.92Miraka 5.80-6.00*

*plus premium of up to 20c/kgMS

Milk prices reported in the table are indicative only and may not apply to all suppliers. Prices can not be directly compared between companies due to differing supply terms such as requirements for shareholdings, and differing terms and/or payment schedules.

Milk production in most regions is expected to continue to grow through at least the early part of next year, which will keep the pressure on commodity prices.

Even if milk production comes back in the second half of 2018 – the beginning of the 2018-19 season – it will take time for commodity prices to recover.

While $5.80/kg MS is lower than forecasts for the 2017-18 season, it is still above the average breakeven point for the average NZ farmer.

Bank forecasts for exchange rates are relatively flat through to 2019, though they have weakened slightly over the past month. The exchange rate taken into account in the AgriHQ forecast is 1c lower than last month, which is providing some support.

The September 2018 milk price futures contract has declined 34c over the past month, settling at $6.40/kg MS yesterday. This contract has steadily lost value following the weak GDT results this month. There are currently 3994 open positions in this contract, equivalent to 24 million kg MS.

The September 2019 milk price futures contract remains at $6.25/kg MS, having yet to trade any further. The spread between the highest bid and the lowest offer is currently 50 cents – it’s unlikely the contract will trade any further until this gap narrows.

The AgriHQ forecast for the 2019-20 season has fallen 20c to $6.15/kg MS. Commodity prices appear unlikely to improve much by this time, though they are expected to improve slightly on the 2018-19 season. Exchange rates are also expected to depreciate a little further, providing some support to this forecast.

7.59 4.72 6.10 7.60 6.08 5.84 8.40 4.40 3.90 6.12 6.75

0.07

0.480.27

0.30

0.32 0.32

0.10

0.25 0.25

0.400.45

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18*

Source: Fonterra

Fonterra Milk Price ($/kg MS) and Dividend (per share)

Milk Price Dividend

0.60

0.65

0.70

0.75

0.80

Jan 16 Apr 16 Jul 16 Oct 16 Jan 17 Apr 17 Jul 17 Oct 17

NZD:USD

0.68 0.69 0.7 0.71 0.72 0.73

NZD:USD

Q4 17 Q1 18 Q2 18 Q3 18 2018

1.16 1.18 1.2 1.22

EUR:USD

Q4 17 Q1 18 Q2 18 Q3 18 2018

0.53 0.55 0.57 0.59 0.61

NZD: EUR

Q4 17 Q1 18 Q2 18 Q3 18 2018




DAIRY COMPANY - SHARE PRICES


This

month

Change Last

month

3 months

ago

Last year

NZZX Fonterra (FCG) 6.23 6.15 5.99 5.91

NZSX Fonterra Shareholders' Fund (FSF) 6.23 6.20 5.99 5.90

Synlait Milk 7.98 5.53 4.25 3.25

The a2 Milk Company 8.42 6.17 4.04 1.98

PGG Wrightson 0.57 0.57 0.59 0.48

Allied Farmers 0.09 0.08 0.09 0.06

NZAX LIC 2.30 2.40 2.40 2.65

Share prices

Source: NZX

Dairy Stock Prices

DeliveryNorthern North

IslandSouthern North

IslandNorthern South

IslandSouthern South

IslandNew Zealand

RangeNew Zealand

Average

Dairy cows

High BW herd June 1st 1950-2100 1800-2300 1400-2000 1800-2400 1400-2400 1905

Low BW herd June 1st 1650-1850 1400-1750 1420-1880 1300-1800 1300-1880 1665

Budget cows June 1st 800-1000 900-1200 950-1400 900-1400 800-1400 1100

In Milk Cows Immediate 1500-1700 1200-1700 1350-1900 1200-2000 1350-1900 1550

Carry over cows June 1st 1400-1500 1450-1800 1100-1500 800-1100 800-1800 1315

Young stockIn calf R2 heifers May 1st 1500-1750 1300-1900 1550-1800 1500-1900 1300-1900 1645

R1 heifers Immediate 850-1000 700-1000 675-1050 800-900 750-1200 940

→

→→

→→

→

LIC, PGW both improve profitability

LIC released its annual results this month. It has lifted its profitability this year, with earnings before interest and tax up $6 million to $8.1 million. Revenue was down for the 2017 financial year; however a focus on minimising costs appears to have paid off. LIC intends to continue to work to minimise operating costs so that it can weather future challenges. LIC’s share price is 10c lower than it was at this time last month, however, at $2.30.

PGG Wrightson (PGW) released its annual results in late September. Net profit after tax was up 6% to $46.3 million. The company did say that the severe weather NZ has experi-enced, including the two cyclones in April, impacted its final quarter earnings, along with other market conditions. PGW has also appointed a new CEO, Ian Glasson, effective from 1 November 2017. Mr Glasson has experience in agribusiness and branded food sectors across several international markets.

The a2 Milk Company’s (ATM) share price continues to rocket up. It reached $8.42 yesterday, up another $1.89 since this time last month. Synlait (SML) has seen similarly stellar results, with its share price having lifted $2.12 over the past month, reaching $7.98 yesterday. The cooperation between the two companies is paying off for both of them. Both companies have initiatives in place that will help them continue to grow over the next year, including new sites for SML and registration with the Chinese authorities to allow ATM to continue to sell its infant formula into this market.

Fonterra shares – both Fonterra Cooperative Group (FCG) and Fonterra Shareholder’s Fund shares – remain at about the same level as they were at this time last month. Both FCG and FSF shares are currently priced at $6.23. Prices did drop to $6.10 in early October but have steadily recovered since then.

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2.5

5.405.605.806.006.206.406.60

Oct 16 Jan 17 Apr 17 Jul 17 Oct 17

Milli

ons

Source: NZX

Fonterra Shareholder Fund last traded price & daily trading volumes

Volumes Price

0

10

20

30

40

50

0

30

60

90

120

Oct 15 Apr 16 Oct 16 Apr 17 Oct 17

Land Price

Number of Farm Sales

Source: REINZ

New Zealand Dairy Land Sales

Sales Volume (previous 3 mths) Land Price $/kgMS

monthly inside this issue milk production 7 dairy milk price 10 dairy … · ph 2 email web monthly...

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