A dairy "bellwether" drops prices again

by Hoard's Dairyman staff

Just how much milk could be available globally in 2015? Plenty, is the short answer.

New Zealand believes the demand-supply balance has tipped and created a buyer's market. As a result, Fonterra, which handles 95-plus percent of the nation's milk supply, dropped its expected pay prices by 44 percent in the last six months to $4.70 per kilogram of milk solids. If carried out, this could be the lowest pay price since 2007's $3.87 per kilogram of milk solids.

In New Zealand, there are multiple reasons for this drastic price reduction. On the heels of an $8.40 per kilo of milk solids last year, New Zealand dairy farmers continued to ramp up milk production. Dubbed by some as the Saudi Arabia of milk, New Zealand is now home to 6.7 million dairy cows, up 1.5 million from a decade ago (5 million), according to Statistics New Zealand. This has all taken place in a nation with roughly 4.5 million people that relies on tourism as its second largest industry.

Having the world's leading dairy exporter cut pay prices by 44 percent in the last six months is a big deal for Fonterra, a co-op that handled nearly 25 percent of the world's trade last year. The latest market adjustment to a $4.70 pay price was made on December 10 in response to the new production forecasts, growing world product inventories, tensions in Russia and the Ukraine and somewhat slumping dairy demand in China, the world's leading dairy importer.

Another strong indicator of dairy prices, at least in the southern hemisphere, is the Global Dairy Trade also based in New Zealand. In mid-December, the nine dairy product mix averaged $1.18 per pound. As a result of these sluggish dairy prices, the Kiwi dollar has slipped to an exchange rate of roughly 78 cents when compared to one U.S. dollar, as dairy is big business and greatly affects the island nation's economy.

An export game changer
Not only does this impact the country's leading industry - dairy - but its banks, too. The Wall Street Journal noted lending to dairy farmers has risen 42 percent since 2008. In world markets, that makes New Zealand dairy products appear less expensive when compared to American products and could ultimately further slow U.S. dairy export sales.

What does that mean for America's dairy producers? On the flip side, New Zealand's dairy products will appear cheaper to international customers since a great deal of dairy trade occurs using the U.S. dollar. Even so, though sales should take place, the $4.70 payout is below the cost of production for some New Zealand dairies. Local reports say New Zealand milk has begun to fall as producers opt to cull cows and trim losses. The downturn could be relatively brief if European and U.S. producers follow suit.

As New Zealand products look less expensive, it has started to slow American sales. U.S. dairy shipments fell 8 percent compared to last October's sales. That was on top of September's 16 percent downturn from the same time last year. In the U.S., October exports represented 14.4 percent of total U.S. milk production.

Meanwhile, New Zealand is the world's bellwether of dairy markets as 90-plus percent of dairy products leaves its shores. That makes them fully exposed to world markets and fluctuating prices. Hence, the rather brisk December milk payout correction to $4.70 per kilogram of milk solids.

This article appears on page 29 of the January 10, 2015 issue of Hoard's Dairyman.

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