June 2, 2016

Recovery in Oceania Delayed

 |  By: Fran Howard

Recovery in dairy farm profitability and milk production in Oceania appears to be a ways off yet, and that bodes well for a world that is currently awash in milk and dairy products.

For the second year in a row, New Zealand dairy producers are looking at farm-gate milk prices that are too low to fully cover production costs, according to a USDA Foreign Agricultural Service Global Agricultural Information Network (GAIN) report. The report indicates that marginal costs for the last 5-15% of producers’ herds are much greater than the marginal return.

“Since 2014, New Zealand dairy producers have trimmed their nation’s herd to 4.93 million head, a reduction of 5% or nearly 250,000 head,” says Mary Ledman, dairy economist with the Daily Dairy Report and president of Keough Ledman Associates Inc., Libertyville, Ill. “Additional culling is also expected unless price signals for the upcoming production season improve.”

The combination of a smaller milk herd and lower profitability have taken a toll on New Zealand’s milk supply. “Calendar year 2016 milk output at 20.9 million metric tons is expected to be 3% less than 2015 production, which was 1.5% lower than 2014’s peak,” Ledman notes. “Nevertheless, 2016’s performance is now expected to be slightly better than the October 2015 GAIN report projected due to more favorable output in first-quarter 2016 and expected higher yields in the fourth quarter of this year. Granted, more favorable year-over-year output later this year will be contingent on improved financial conditions.”

WMP to recover first

The island nation dominates global whole milk powder (WMP) production, with 1.35 million metric tons in 2015, down nearly 8% from 2014’s 1.46 million metric tons in 2014. This year, USDA forecasts that New Zealand will produce 380,000 metric tons of skim milk powder (SMP), down 10,000 metric tons from 2015 and 45,000 metric tons less than in 2014. Butter and anhydrous milkfat (AMF) production is also trending lower, from 580,000 metric tons in 2014 to an expected 570,000 in 2016, she adds.

While the GAIN reports states that some market analysts think WMP prices will be quickest to recover because of very limited global stocks and a reduction of WMP production in New Zealand, the largest exporter of WMP, results from the latest Global Dairy Trade (GDT) auction foreshadow only modest price increases, according to Ledman.

In neighboring Australia, producers are also facing much lower prices, and some will see lower prices for years. Milk production is forecast at 9.8 million metric tons in 2016, which is on par with 2015’s output but down from 2014’s 9.7 million metric tons and also lower than USDA’s preliminary estimate of 10 million metric tons.

“Adverse seasonal conditions and the recent significant downturn in milk prices have soured the outlook for output in Australia for the rest of 2016,” Ledman says. “Nevertheless, USDA expects the Australian dairy herd to remain stable at 1.7 million head. This may be hopeful given the current milk price outlook and repayment penalties facing producers who supply milk to Australia’s largest milk buyer, Murray Goulburn. These producers are facing three years of assessments to cover 2015-16 milk payouts that exceeded the company’s ability to cover milk costs.”