New Zealand. Dairy and Products Annual. Oct 2014 Nov. 11, 2014
Milk production continues to climb (22.1 million metric tons in 2015, 1.75% up on 2014) in the face of severe price drops both at international trade level and at the farm gate.
Note: the Marketing Year (MY) is the same as the calendar year (CY)
Since early 2014 dairy farmers in New Zealand have witnessed a dramatic turnaround in the market situation and outlook for dairy. While milk supply from New Zealand is continuing its upward trend, and is now estimated at 21.7 million metric tons (MT) in 2014 (eight percent up on 2013) with a forecast production of 22.1 million MT in 2015, milk prices have weakened substantially. Dairy farmers received an average of NZ$8.40/kg milk solids (MS) for the 2013/2014 season ended May 2014, but are now looking at a forecast payout for the 2014/2015 season of NZ$5.30/kg MS or even lower. At these levels of payout it is projected 25% of farmers won’t cover their farm working and debt servicing expenses in 2015.
The prime commodity produced by New Zealand milk processors, whole milk powder (WMP), accounts for approximately 49% of all dairy production from New Zealand. In 2014 1.41 million MT is forecast to be produced, 8.5% ahead of 2013. In 2015 WMP production is forecast at 1.45 million MT, three percent up on 2014. Indications are, while international WMP prices may be low now, they will be first among the dairy commodities to recover and processors in New Zealand want to be ready for that upswing. In addition the low prices will ultimately stimulate demand. Exports of WMP are forecast at 1.35 million MT and 1.42 million MT in 2014 and 2015 respectively.
While the skim milk powder (SMP) and butter production stream has been more valuable for most of 2014 it is the butter side of the equation which has been pulling the value along. Because of production constraints from the record peak milk flows in October 2014, SMP production, which entails quicker throughput in the factories, is likely to increase by six percent in 2014 to 430,000 MT but hold at that level in 2015. It is thought stocks will increase in 2014 limiting the calendar year growth for exports to 420,000 MT which would still be seven percent ahead of 2013. A run down in stocks in 2015 should see exports increase to 435,000 MT.
Butter exports are soaring at 17% ahead of 2013 on a year-to-date (YTD) basis. This pace is expected to slow in the last four months of the year but is still expected to reach a record 556,000 MT (10% over 2013) shipped from a production level of 570,000 MT. For 2015 it is expected butter exports will decline to a forecast 539,000 MT (3% reduction) from production of 570,000 MT.
Cheese production is forecast to be stable at 325,000 MT and 320,000 MT for 2014 and 2015 respectively. Exports are expected to decline by 2,000 MT in 2014 to 275,000 MT and then rise by five percent in 2015 to reach 289,000 MT on account of inventory changes.
Infant milk formula (IMF) exports once thought to be the key to adding value to dairy processing in New Zealand have disappointed over the last twelve months since the Whey Protein Concentrate 80 (WPC80) contamination incident broke and the tightening of the regulations in the Chinese market. On a YTD basis IMF exports in 2014 are expected to decline 38% at 35,000 MT in 2014 compared to 48,000 MT in 2013 and even this may be optimistic.
Impact of Low World Dairy Product Prices on New Zealand
World dairy prices in 2014 have declined dramatically. Over one million metric tons of dairy products are traded annually on the Global Dairy Trade (GDT) auction so it is a useful indicator of world prices. The GDT price index peaked in April 2013 at 1573 and hit a secondary peak in February, 2014 at 1482. Since then prices have plunged. As at October 1 the index had plumbed the depths at 762. This is a price index fall of 49% since February 2014 and 52% from the peak in April 2013.
The good times for dairy farmers have gone away. For the 2013/2014 production season (June 1, 2013 to May 31, 2014) farmers were paid a record of NZ$8.40/kg of milk solids (MS). The payout for the 2014/2015 season is forecast by Fonterra at NZ$5.30/kg MS. If export prices remain at their current levels even this forecast payout would be in jeopardy.
Nevertheless, the low price forecast for farmers’ milk is unlikely to affect 2014 calendar year milk production. Farmers were well prepared for the 2014 spring (Aug-Nov) having spent money received in the previous financial year to purchase supplements ahead of the spring commencement of the new production season. In addition the spring weather so far has been conducive to pasture growth and dairy farmers are making the most of it at the moment.
It could be a different story in 2015 especially if there are drought conditions over a large proportion of the dairying areas during the first half of the calendar year. Farmers will be watching their expenditure very carefully and rather than purchase extra supplementary feed at a marginal cost that exceeds the marginal return they will adopt other measures such as drying cows off early, selling cull cows early, and once a day milking to reduce feed demand which will also reduce milk production.
The impacts of the price downturn are likely to reverberate into the 2015/2016 production season, especially if forecast milk prices are not optimistic. Looking back over the last six to eight years the GDT price index revolves around a two to three year cycle whereas farmers milk solids payouts are on a three year cycle between price peaks. It is quite conceivable that any recovery in prices during 2014/15 will be minor and the 2015/16 milk solids payout won’t be significantly greater than the payout in 2014/15. This will have farmers very concerned and expenditure will again be very tightly controlled. This will impact on the potential for milk supply growth in the spring of 2015.
The forecasts in this report for 2015 are predicated on the basis of an average summer-autumn rainfall total and a return to a NZ$6.50/kg MS payout forecast for the production year 2015/16. The average payout since 2008 has been NZ$6.66/kg MS.
Milk Supply 2014
Good spring pasture conditions occurring over the majority of New Zealand are boosting milk supply above 2013’s record spring. Now 21.7 million metric tons (MT) of milk is forecast to be harvested in 2014 up 0.3 million MT or 2% from the previous Post forecast
Cow numbers for 2014 are now estimated at 5.1 million head as a result of new survey data received. While this is a 1.6% (81,000 head) reduction from previous forecasts it is still 87,000 head (1.7%) greater than the number on hand in 2013.
It is estimated there were 100 conversions of cropland; sheep/beef pastureland; or forestry land to new dairy farms, which commenced production in August 2014. The combination of extra cows, a kind winter, good spring conditions and high levels of supplementary feed inventories are driving record July to October milk production levels. Imports of palm kernel extract, the prime imported dairy supplementary feed for New Zealand dairy farmers, are currently 39% above the year-to-date import volume that occurred in 2013. These imports are likely being financed by the surplus cash generated by the high milk payout for the 2013/14 production season.
Beyond these factors, a better level of management on farm during the spring, which has become the norm, has added to the enhanced productivity despite the weakening price scenario in New Zealand dairy.
Domestic Consumption Liquid Milk
Revised data for domestic consumption obtained by Post indicates that the new level of consumption shown in the PSD table of 495,000 MT is ten percent higher than had been previously reported.
Milk Supply 2015
Barring another drought during the January-April 2015 period, total milk production is forecast to reach 22.12 million MT in 2015. This would amount to a 1.75% advance on 2014 production levels. On the other hand, of the possibility of drought and the milk price downturn continuing in 2015 increase the downside risk in Post’s production forecast.
Cow numbers are forecast to be up 0.9% at 5.14 million head in 2015. It is likely there will be a lower level of conversions (40 to 60 farms) from other land uses to dairy during 2015. In part this directly attributable to the milk price downturn and a lower level of confidence but also environmental constraints (most notably nitrate leaching limits) are starting to kick in. It is simply taking longer and costing more to get the necessary environmental consents and to build out the needed infrastructure to operate a new dairy farm in New Zealand. Productivity gains, including genetic improvement, suggest a 1.5% per annum increase in milk production. This is discounted to around 0.8% in 2015 because of the influence of the milk price downturn on farmers’ management.
Dairy Production and Inventories
Whole Milk Powder (WMP)
New Zealand Whole Milk Powder (WMP) production is now forecast to reach 1.41 million MT in 2014. This is 3% above our previous estimate and 8.5% above 2013.
As domestic consumption is only estimated at 1% of production, export demand and the forecast export prospects drive WMP production. Exports through August 2014 were a substantial 19% ahead of the same period in 2013 and documents on the Fonterra website suggest WMP production during December 2013 to May 2014 was up approximately 25% on a year-on-year basis. This would be broadly representative of the wider processing industry. It is assumed because New Zealand has a competitive advantage with WMP there will be no less WMP produced in H2 2014 than H2 2013. However it is forecast the inventories will grow by 43,000 MT partly because of the lack of demand for immediate shipping especially to China.
Forecast total production in 2015 is projected to be 1.45 million MT which would be a 3% increase above 2014.
Even though the Butter/AMF and SMP powder stream has been slightly more valuable per ton of milk used for a large part of 2014, trade sources indicate that international prices for WMP will recover more quickly from the current downturn than the other main products such as SMP and cheese. So there will be no wholesale switch to SMP/fat production.
The extra productive capacity which has come on stream over the last 18 months will be used fully in 2015. Fonterra has commenced building two additional powder driers in the North Island which will go into production during 2016. This would increase capacity by somewhere between 200,000 to 300,000 MT per annum.
Skim Milk Powder (SMP)
SMP production is now forecast at 430,000 MT for 2014 which is up by 1% from our last forecast and 6% greater than production in 2013. The SMP/AMF or butter product mix, also known as the SMP powder stream, has been more valuable per ton of milk for 12 of the 19 Global Dairy Trade auctions in 2014. However larger expected surpluses of milk worldwide over the next 12 months are expected to create a greater oversupply of SMP on world markets, delaying price recovery for longer than for WMP. It is forecast that stocks will increase by 8,000 MT as the rate of increase in sales isn’t matching the forecast production growth.
It is anticipated there will be no significant changes to NZ production in 2015. Consequently the SMP production volume is forecast to hold at the 2014 level of 430,000 MT. To some extent the demand for cream or fat products, which are the co-products of the SMP powder stream, will have an influence on the amount of SMP produced. Demand for cream or fat products is still reasonably strong, which will support SMP production. Even though global SMP markets are almost sure to be in oversupply during 2015, New Zealand has established customers with varying end uses, which includes Fonterra’s own subsidiaries off-shore which further process SMP in to consumer products or small sachets.
Fat Products: Butter and Anhydrous Milkfat (AMF)
Butter and AMF production in 2014 is forecast to increase seven percent over 2013 to reach 570,000 MT in butter equivalent. This is an upward revision of six percent from our previous forecast. The Butter/SMP powder stream has been more valuable per ton of milk than the WMP powder stream for much of 2014. Exports are up 15% year-on-year for the eight months ending August 2014. Additional exports have likely been generated by a combined 7,000 MT run down in inventories and the increased production.
In butter equivalents production of butter and AMF is forecast to be 570,000 MT. This represents no change relative to 2014. AMF and especially butter have been in considerable demand during 2014. However with global supply of butter products likely to increase in 2015 it is likely that New Zealand processors will aim to consolidate their existing markets and not boost production.
Cheese production in 2014 is estimated at 325,000 MT just 1,000 MT above the previous forecast. Capacity at all milk processing sites in New Zealand will again be tight in the Southern Hemisphere Spring of 2014 during the peak milk flows. Consequently cheese making plants will be utilized fully for a period during the spring which would indicate that similar volumes of cheese to past years will be produced. In addition financial gross margins for cheese have improved relative to the powder streams which will be more encouraging for cheese production than spring 2013 margins were.
Our forecast indicates an increase in inventories of 17,000 MT as shipment data indicate a slowdown in exports for the first 8 months of 2014.
For 2015 cheese production is forecast to be 320,000 MT. This is a marginal decrease from 2014 of 1.5%. While there is a transition going on within cheese production from the traditional large blocks of cheddar to fresh cheeses (such as mozzarella, cream, & cottage) and customer ready packs of grated or sliced cheese, it is gradual and customer driven. Ultimately cheese production could increase significantly if the switch to fresh cheeses really takes hold.
Whole Milk Powder
For 2014 WMP exports are estimated to reach 1.35 million MT, a slight upward revision from the previous Post estimate and 5% ahead of exports in 2013. Exports as of August have surged ahead by 19% compared to the same period in 2013. This pace of shipping is likely to slow in the last four months of the year. Trade sources indicate that there are considerable un-sold stocks in China which is reducing Chinese demand for imports considerably. This is allowing the second tier purchasers back into the market at significantly reduced prices but it is thought that the increased purchasing by these countries won’t be enough to counterbalance the Chinese reductions.
In 2015 it is forecast WMP exports will continue to grow by 4.5% to reach 1.42 million MT. It is anticipated demand in China will start to pick up and the low prices will stimulate demand in many markets.
Cheese exports for the year-to-date (YTD), August 2014, are lagging (5%) behind the 2013 volume at the same date. It is now anticipated that by year end, 2014, cheese exports will reach 275,000 MT, 2,000 MT less than 2013. This revision is 5% less than the total projected last April. Traditional cheddar exports are down 9% for the YTD ostensibly explaining the lower rate of exports. However there has been no overall growth in fresh cheese exports which is disappointing but one major destination South Korea has reduced its imports of fresh cheese by 97% (9,600MT). Exporters have been successful in replacing South Korean buyers with new customers or ramping up volumes to existing purchasers.
For 2015 cheese exports are forecast at 289,000 MT, five percent up on 2014, which takes into account the increased fresh cheese capacity and a catch up in export shipments after the buildup in stocks over the previous twelve months. The global dairy supply and demand situation would suggest that trading channels will be awash with cheese over the next year from the Russian import ban and increased supplies of milk. Exporters here will be aiming to protect traditional cheddar markets and expand where practical with fresh cheese especially in to the Asian food service area.
Skim Milk Powder (SMP)
The pace of SMP exports so far in 2014 hasn’t been dramatic running at 8% behind 2013. As a result the anticipated total for 2014 has been reduced to 420,000 MT which is one percent less than had been previously forecast. This level is seven percent ahead of 2013 and may still be too optimistic.
For 2015 it is anticipate that stocks will be run down slightly allowing a four percent increase in exports to 435,000 MT.
Butter and Anhydrous Milkfat (AMF) Exports
Butter and AMF exports, in 2014 reported in butter equivalents, are set to rise substantially to 556,000 MT. This is a ten percent increase over 2013 and an eight percent revision to the last forecast back in April. For 12 of the 19 GDT auctions during 2014 the butter/SMP powder stream has been more valuable than WMP. Processors aiming to maximize their margins and the value of the milk have been leaning toward the butter/SMP stream which has now shown up in the export statistics. For the YTD August 2014 total AMF and butter exports are 17% ahead of the previous year. Increased butter exports are responsible for all the increase. It is thought that this pace won’t continue right through until the end of the year because part of the increase in exports involves a run down in inventory levels which will have already happened.
It is forecast for 2015 butter and AMF exports will consolidate somewhat and be reduced by 3% from 2014 to sit at 539,000 MT butter equivalents. Competition from other exporters all around the globe will be tougher in 2015 when they start to push harder for sales of the surpluses of fat products that are likely to be in the system by then.
Infant Milk Formula (IMF)
Infant milk formula (IMF) has gone from the poster child for how to add value to New Zealand dairy products to the problem child. Exports have plunged 38% for the YTD August 2014 compared to 2013. Principally this has been caused by Fonterra’s Whey Protein Concentrate 80 (WPC80) contamination issue which surfaced August 2013. Even though subsequently it was shown that the contamination was a non-toxic bacterium the product recall and the publicity looks to have tarred all IMF manufacturers in New Zealand and has affected sales in all the main markets.
In parallel to these developments Chinese food safety authorities have been working through a far reaching plan to rationalize and control the IMF market in China. Not only have authorities rationalized the production and marketing of domestic IMF products this rationalization and suites of new regulations have extended to all countries whose own dairy processors wish to manufacture and export IMF to China.
There has been shakeout in New Zealand. From approximately 15 manufacturers who produced over 100 brands mainly on contract this has been cut back to nine manufacturers and most of the brands produced on contract have disappeared. The Chinese authorities are looking for integrated businesses that own or control the supply chain from the intake of milk, through the manufacture of IMF, to the logistics and distribution in China. The main dairy processors involved with their own branded IMF products: Fonterra, Westland, and Synlait are now registered for the Chinese market.
Used to standardize WMP production, lactose imports have grown considerably during 2014. At 68,768 MT for YTD August 2014 they are 54% ahead of the previous year. Sixty eight percent of the total volume was sourced from the U.S.
Trade Policy - Market Access Issues
Reportedly in late September/early October Sri Lanka's health ministry suspended the distribution and sale of the three batches of Fonterra’s Anchor milk powder. The suspension followed a complaint of food poisoning in some children in the southern village of Girandurukotte, 224 kilometers from the capital Colombo. Seventy six tons of milk powder was affected which a Fonterra official said their own testing had shown to be safe to consume.
In an incident dating back to August 2013 130 MT of powder was destroyed after it was held in storage beyond the food safety use-by date. There was a dispute over testing results which Sri Lankan officials said showed traces of Dicyandiamide (DCD) was present in the powder