Highlights

Dairy Farmers are now in the second year of below breakeven farmgate milk prices and have cut the national dairy cow herd number over the last eighteen months by five percent to 4.9 million head. Milk supply which is now forecast at 20.9 million metric tons for 2016 is down 4.5% from the peak in 2014.

Executive Summary

For the second year in a row, New Zealand dairy farmers will have to endure a low farmgate milk price which will mean most dairy farms will not achieve a breakeven financial outcome for the Financial Year (FY) 2016. Very low farmgate milk prices (NZ$4.00/kg MS to NZ$5.00/kg MS) are likely to continue into FY2017 and could even stretch into FY2018, according to some industry participants. Very simplistically for many farmers the marginal costs of the last 5% to 15% of their cows are now very much greater than the marginal return. So for many reducing cow numbers is beneficial to their financial situation. Unless the farmgate price signals for the 2016/2017 production season very quickly indicate approximately NZ$6.00/kg MS then this right-sizing is likely to continue into 2017.

Over the two years 2014 to 2016 dairy farmers are estimated to have collectively reduced the national dairy cow herd size by 5% to 4.93 million (m) head. This combined with continued cost minimization is now having an effect on national milk supply. The 2016 milk production total is now forecast at 20.92m metric tons (MT), which amounts to a 4.5% reduction since 2014. This is a slightly better result than had been previously forecast, up 1% on the November 2015 forecast because milk production in the first quarter 2016 surpassed expectations and it is anticipated per cow yields in the fourth quarter 2016 will be up.

In turn New Zealand dairy production is reducing. Now total production of all dairy products (excluding liquid milk) is forecast to be 2.948m MT in 2016 which will be 2.2% down from the 3.014m MT estimated for 2015. However this revision for 2016 is 2% up on the previous forecast reflecting the upward revision for milk supply in 2016.

The move in 2015 to emphasize cheese, casein, and milk protein concentrate (MPC) manufacture is likely to continue into 2016. In addition the scaling up of liquid UHT milk manufacture for export will continue in 2016.

Total Dairy exports for all products including liquid milk are now forecast to reach 3.096m MT in 2016 which is a three percent upward revision on the previous forecast. Generally the slightly greater milk supply, than had been expected, in this revision is behind the export increase. In 2015 exports totaled 3.141m MT, a 3.7% upward revision, reflecting the better than expected milk supply in 2015 and an estimated 22,000 MT run down in ending stocks.

The major changes to the export line-up for this revision of the 2016 forecast are: Whole Milk Powder (WMP) down 19,000 MT (-1.4%); Skim Milk Powder (SMP) up 16,000MT (+4.4%); cheese up 40,000 MT (+14%); and casein up 25,000 MT (+33%).

Milk Supply2016

Milk production for first quarter of 2016 has been above expectations, which has contributed to a small upward adjustment for milk supply for 2016 to 20.92 million (m) metric tons (MT) from 20.75m MT previously, a 0.5% improvement. The factors which are dominant in determining this year's production are:

  • The weather for the first quarter (Q1) in 2016 generally over the country, apart from a couple of dry areas (some districts in the Waikato, and the Manawatu), was favorable so pasture production was ahead of expectations hence the better milk production in Q1. El Nino weather patterns which were forecast did not eventuate.
  • Milk production in the second quarter (Q2) is now falling behind the similar period in 2015.
  • With the farmgate milk price so low farmers are minimizing spending on feed supplements. As the rate of pasture growth is slowing down during the autumn (April-May) the herds are being progressively dried off rather than being fed supplements to extend the lactation.
  • Based on the cow kill so far this year and anecdotal reportage of farmers' plans for herd numbers in the spring it is forecast the national herd will be down a further 75,000 head, which would put it at 4.93m head a 3.4% downward revision and a 1.5% year-on-year reduction.
  • Reportedly cow condition across the country is generally good and pasture levels going into winter have been managed to optimum levels.
  • The effect of the reduced cow numbers will be felt in the spring (August-October) however it is likely to be muted as long as spring weather conditions are close to normal because the remaining cows will have a greater pasture allowance on a per head basis.

2015

Final actual milk supply data is now available which shows that for 2015 total New Zealand milk production was 21.58m MT, which is a one percent upward revision. The actual total was 1.4% less than the 2014 production. The improvement came about because the spring and early summer (August through December) milk production was better than expected. The following dynamics were at play:

Dairy farmers made late culling decisions to their cow numbers just before calving (August) which meant cow numbers were reduced by 197,000 head (3.8%).

However having fewer cows with approximately normal pasture supplies gave the remaining cows a slightly greater daily pasture allowance, which flowed through to better daily per cow milk production in October, November, and December.

Dairy Farm Profitability

For the second year in a row, New Zealand dairy farmers will have to endure a low farmgate milk price which will mean most dairy farms will not achieve a breakeven financial outcome for the Financial Year (FY) 2016. Very low farmgate milk prices (NZ$4.00/kg MS to NZ$5.00/kg milk solids (MS)) are likely to continue into FY2017 and could even stretch into FY2018, according to some industry participants.

Farmers are scrambling to eliminate unnecessary spending. They are examining every part of their businesses from staffing levels to general overheads such as debt servicing and rent to find efficiencies that will reduce inputs cow numbers is beneficial to their financial situation. Unless the farmgate price signals for the 2016/2017 production season very quickly indicate approximately NZ$6.00/kg MS then this right-sizing is likely to continue into 2017. Expenses while still maintaining production. Most farms are struggling to find a profitable business model which at revenue equating to NZ$4.50/kg MS to NZ$5.00/kg MS will cover all expenses including debt servicing and leaves a profit. Very simplistically for many farmers the marginal costs of the last 5% to 15% of their cows are now very much greater than the marginal return.

PSD Milk

Dairy, Milk Fluid

2014

2015

2016

New Zeland

Official

Old Post

New

Post

Official

Old Post

New

Post

Official

Old Post

New

Post

Cows In Milk

5175

5175

5176

5200

5200

5003

5100

5100

4928

Cow's Milk Production

21893

21893

21893

21391

21391

21582

20745

20745

20921

Other Milk Production

0

0

0

0

0

0

0

0

0

Total Production

21893

21893

21893

21391

21391

21582

20745

20745

20921

Other Imports

2

2

2

2

2

2

2

2

2

Total Imports

2

2

2

2

2

2

2

2

2

Total Supply

21895

21895

21895

21393

21393

21584

20747

20747

20923

Other Exports

136

136

136

165

165

171

200

200

210

Total Exports

136

136

136

165

165

171

200

200

210

Fluid Use Dom. Cons

495

495

495

497

497

497

497

497

497

Factory Use Consum.

21214

21214

21214

20681

20681

20866

20000

20000

20166

Feed Use Dom. COnsum.

50

50

50

50

50

50

50

50

50

Total Dom.

Consumption

21759

21759

21759

21228

21228

21413

20547

20547

20713

Total Distribution

21895

21895

21895

21393

21393

21584

20747

20747

20923

CY Imp. from U.S.

0

0

0

0

0

0

0

0

0

CY. Exp. to U.S.

0

0

0

0

0

0

0

0

0

TS=TD

0

0

0

0

0

0

0

0

0

Dairy Production and Inventorie

After the rather dismal dairy commodity price plunge in August 2015 prices recovered and seem to be bumping along something of a floor at present. Whether this is a cause for optimism about price increases over the next six months is still very much open to conjecture though.

During 2015 the relative pricing for cheese and casein was quite often at a premium to the powders In addition during 2015 fat (butter, and AMF) prices were relatively good. Consequently cheese production was emphasized along with the products which could utilize the Skim Milk Powder (SMP) side of the Skim/Fat manufacturing stream such as casein and milk protein concentrates (MPC). Because whole milk powder (WMP) prices have been relatively lower than cheese and casein prices for much of 2015 WMP production is down and it lost some of its share of the milk supply pool.

However as 2016 has got underway the price relativities between the different product streams has tightened up considerably. Bearing Alternative protein products to SMP (Casein and MPC) will again be emphasized; cheese will hold its own, and WMP will be down slightly in line with milk supply reductions.

A Guide to Inventory levels

It is estimated the ending stock level of the main commodities WMP, SMP, AMF/Butter, and cheese have reduced from 2014 to 2015 by 22,000MT and were estimated at 392,000MT at end 2015 (five percent down). By the end of 2016 it is forecast another 8,000MT will be shaved off the inventory total, or two percent.

Whole Milk Powder (WMP)

WMP production is forecast to reduce again in 2016 to be 1.35m MT down two percent on the previous forecast. This reduction is in line with reductions to the milk supply. The 2015 production is now estimated at 1.39m MT based on the greater than expected export volume.

There are commentators who think WMP prices will be the quickest to recover since there are no great stockpiles anywhere and New Zealand, the largest exporter of WMP, is reducing its production of WMP. However the commodities pricing from the GDT auctions suggest that price increases won't happen until the last quarter in 2016 at the very earliest but more likely sometime in 2017. Additionally the very low prices for SMP are likely to put a ceiling on how high WMP prices can go before some dairy product manufacturers substitute SMP and an alternative fat ingredient for WMP. For these reasons it is thought WMP production will not be emphasized in 2016 but continue on the downward trend established in 2015.

PSD

Dairy, dry whole milk. Powder

2014

2015

2016

New Zeland

Official

Old Post

New

Post

Official

Old Post

New

Post

Official

Old Post

New

Post

Beginning Stocks

157

157

157

180

180

180

183

180

179

Production

1,460

1,460

1,460

1,375

1,375

1,390

1,375

1,375

1,350

Other Import

1

1

1

6

3

7

1

3

5

Total Import

1

1

1

6

3

7

1

3

5

Total Supply

1,618

1,618

1,618

1,561

1,558

1,577

1,559

1,558

1,534

Other Export

1,423

1,423

1,423

1,360

1,360

1,380

1,359

1,359

1,340

Total Supply

1,423

1,423

1,423

1,360

1,360

1,380

1,359

1,359

1,340

Total Export

2

2

2

3

3

3

4

4

4

Other Exports

13

13

13

15

15

15

15

15

15

Dom. Cons

15

15

15

18

18

18

19

19

19

Factory Use Consum.

1,438

1,438

1,438

1,378

1,378

1,398

1,378

1,378

1,359

Feed Use Dom. COnsum.

180

180

180

183

180

179

181

180

175

Total Dom.

Consumption

1,618

1,618

1,618

1,561

1,558

1,577

1,559

1,558

1,534

Total Distribution

0

0

0

0

0

0

0

0

0

CY Imp. from U.S.

0

3

3

0

3

3

0

2

2

TS=TD

0

0

0

0

0

0

0

0

0

Cheese

In 2016 Cheese production is forecast to be 350,000MT just 5,000MT less than the 2015 total, but a 13% upward revision on the previous forecast. For the last twelve months cheese prices in the GDT auction have almost consistently been USD500 greater than the WMP prices indicating it is more profitable to produce cheese. This explains why cheese production has been emphasized over the last twelve months. Relatively speaking though the value of milk going into the cheese stream versus the WMP stream has tightened up considerably over the last few months. It is still likely cheese production will continue at current levels given the competitive outlook and the factor that by utilising milk in cheese this reduces volume of milk available for WMP production which will help the process of shortening up the supply of WMP and ultimately achieving WMP price increases. In addition cheese production is continuing to be diversified into fresh cheese production such as mozzarella and further processing for food service by grating or slicing.

PSD

Dairy, Cheese

2014

2015

2016

New Zeland

Official

Old Post

New

Post

Official

Old Post

New

Post

Official

Old Post

New

Post

Beginning Stocks

50

50

50

64

64

64

54

60

60

Production

325

325

325

347

347

355

310

310

350

Other Import

7

7

7

8

8

8

8

8

8

Total Import

7

7

7

8

8

8

8

8

8

Total Supply

382

382

382

419

419

427

372

378

418

Other Export

278

278

278

325

319

327

285

278

318

Total Supply

278

278

278

325

319

327

285

278

318

Total Export

40

40

40

40

40

40

40

40

40

Total Dom. Cons.

0

0

0

0

0

0

0

0

0

Total use

40

40

40

40

40

40

40

40

40

Ending Stocks

64

64

64

54

60

60

47

60

60

Total Distribution

382

382

382

419

419

427

372

378

418

CY Imp. from U.S.

0

1

1

0

1

1

0

1

1

CY. Exp. to U.S.

1

7

7

0

14

14

0

7

7

TS=TD

0

0

0

0

0

0

0

0

0

Whole Milk
Powder

Official

Old Post

New

Post

Official

Old Post

New

Post

Official

Old Post

New

Post

Beginning

Stocks

157

157

157

180

180

180

183

180

179

Production

1,460

1,460

1,460

1,375

1,375

1,390

1,375

1,375

1,350

Other

Imports

1

1

1

6

3

7

1

3

5

Total

Imports

1

1

1

6

3

7

1

3

5

Total

Supply

1,618

1,618

1,618

1,561

1,558

1,577

1,559

1,558

1,534

Other

Exports

1,423

1,423

1,423

1,360

1,360

1,380

1,359

1,359

1,340

Total

Exports

1,423

1,423

1,423

1,360

1,360

1,380

1,359

1,359

1,340

Human

Dom. Cons.

2

2

2

3

3

3

4

4

4

Other Use,

Losses

13

13

13

15

15

15

15

15

15

Total Dom.

Cons.

15

15

15

18

18

18

19

19

19

Total use

1,438

1,438

1, 438

1,378

1,378

1, 398

1, 378

1, 378

1, 359

TS=TD

0

0

0

0

0

0

0

0

0

Butter and AMF production for 2016 is now forecast to be similar to 2015 at 570,000MT (butter equivalents) just 5,000MT or one percent less than 2015. This change amounts to a four percent upward revision. This revision brings the forecast into line with the current thinking that production volumes will be similar to last year since the outlook for the fat products is to continue to experience solid demand.Butter and Anhydrous Milk fat (AMF)
PSDIt is forecast SMP production in 2016 will be 380,000MT, up six percent from the previous forecast. While SMP prices are at extremely low levels and there is a historically large spread between SMP and WMP prices recent history would suggest New Zealnd will continue to produce SMP at a level between 380,000MT and 420,000MT per annum. The processors have long term customers to supply and Fonterra in particular has its own off-shore further processing which utilises SMP as an ingredient. It is thought that SMP production will be limited to those needs in 2016. Now it is estimated that the 2015 production level was 390,000MT, a six percent upward revision, based on the actual export level being well above previous expectationsSkim Milk Powder (SMP)

PSD

Dairy, Butter

2014

2015

2016

New Zeland

Official

Old Post

New

Post

Official

Old Post

New

Post

Official

Old Post

New

Post

Beginning Stocks

54

54

54

53

57

57

72

81

63

Production

580

580

580

570

570

575

550

550

570

Other Import

1

1

1

1

1

1

1

1

1

Total Import

1

1

1

1

1

1

1

1

1

Total Supply

635

635

635

624

628

633

623

632

634

Other Export

560

556

556

530

525

548

530

545

550

Total Export

560

556

556

530

525

548

530

545

550

Dom. Cons.

22

22

22

22

22

22

0

22

22

Total use

582

578

578

552

547

570

530

567

572

Ending Stocks

53

57

57

72

81

63

93

65

62

Total Distribution

635

635

635

624

628

633

623

632

634

CY Imp. from U.S.

0

0

0

0

0

0

0

0

0

CY. Exp. t o U.S.

30

30

31

0

30

20

0

30

25

TS=TD

0

0

0

0

0

0

0

0

0

Whole Milk Powder

In general because domestic consumption is such a small proportion of production (only three to four percent) exports follow the same trends as production. This is only complicated in a minor way by inventory changes. The comments made on directions being taken with production are valid for export trends as well.

Exports of WMP in 2016 are now forecast to be 1.34m MT, a 1.4% downward revision based on reduced production volumes. The 2015 actual volume exported was 1.38m MT, 1.5% better than had been expected. While demand from China shrunk again 2015, New Zealand exporters have diversified away from China to many third tier markets evidenced by the rest of the world total volume outside the top ten destinations increasing by 16% in 2015.

Cheese

It is now forecast cheese exports in 2016, at 318,000MT, will fall just short of the total shipped in 2015 of 327,000MT. However the 2016 revised forecast will still be 11% greater than had been previously forecast because the pricing outlook for cheese still looks attractive enough to maintain production at similar levels to 2015.

New Zealand Export Statistics for Cheese

Skim Milk Powder (SMP)

SMP exports in 2016 are now forecast at 380,000MT which is a four percent upward revision based on historical trends coupled with the pessimistic outlook for SMP pricing. The 2015 actual exports at 411,000MT were eight percent above previous expectations. This level is estimated to incorporate a 23,000MT run-down in inventories built up in 2014 when the milk supply peak was at record levels which necessitated speedy manufacture to get through the daily intake volumes.

It is envisaged that given the market outlook for the fat products is favorable that exports in 2016 at 550,000MT (butter equivalents) will be very similar to 2015 where the actual tonnage shipped was 548,000MT (butter equivalents).

Imports

Lactose

Estimated lactose imports peaked in 2014 at 102,567MT but by the end of 2015 imports of lactose had dropped to 88,707MT (14% reduction). Imported lactose is used as an ingredient in WMP to standardize the protein content. As WMP has reduced, the need for as much lactose has also reduced. In 2014 the US supplied an estimated 67,601MT or 66% of New Zealand's total imports and in 2015 the tonnage was 66,029MT but was 74% of the total.