Dairy industry update: can New Zealand save the dairy world?

The one real shining light of the current crisis as far as global dairy markets are concerned is that the New Zealand milk tap is just about to be turned off.

Yes, of course they will have product in stock, but the Kiwis are renowned for turning product into money without delay so they won’t have a huge stockpile. Up in the North Island, drought has hampered late-season New Zealand milk production and many farmers have dried off a month early already.

Down in the South Island, heavy rains before Christmas dampened milk supply and again now many farmers are drying and culling cows at this time of the year. Calving starts up in the North Island in early to mid-July for most farmers and then slightly later late July/early August for a lot of farmers in the South Island.

Better than expected

The GDT auction result this week, while down on average 4%, was still better than what many would have expected. Anhydrous milk fat (AMF) was very negative, but pricing was generally at or better than expectation. The key was China was very strong in terms of purchasing. Some of the data from the auction shows us north Asia – including China, Russia and Turkey – were big players, but China was leading the way in purchasing. This gives us some indication that China is recovering in terms of dairy demand following the coronavirus restrictions over there. New Zealand would be a big supplier of product into China and the fact that it is at the end of the milk producing season in New Zealand when Chinese demand is recovering suggests to a reasonable extent the Chinese will be on the market looking for product.

We are starting to see key foodservice outlets such as Starbucks and McDonald’s re-open their doors in China

This week Fonterra chair John Monaghan sent a letter to New Zealand suppliers. His message was simple – Fonterra would hold to their word on a very strong milk price for the 2019/2020 season. However, he did say the effects of the COVID-19 outbreak were likely to last well into 2021.

He said: “Key among those markets is China. That economy is slowly returning to a new normal. Chinese bidders returned to the last Global Dairy Trade auction at levels closer to their historic participation. We are starting to see key foodservice outlets such as Starbucks and McDonald’s re-open their doors in China.”

In terms of sending a signal to New Zealand dairy farmers, he talked down New Zealand prices for next year and asked New Zealand farmers to be prudent on spending.

He said: “We will be considering the high levels of uncertainty that we are seeing across the world, stronger supply signals from key dairy regions, and the NZ/US exchange rate as we forecast what prices could be more than a year from now. We encourage you to consider the level of global uncertainty we are all seeing now and out into the future and be cautious with your significant on-farm decisions.”

Shutting down

So, in summary, New Zealand farmers are shutting down or are very close to shutting down milk production. This helps us (and those exporting dairy product) in terms of less product coming on the market. Secondly, China is coming back in the market for product as evidenced in the activity on the GDT auction this week. Thirdly, the chair of Fonterra is indicating to suppliers to be careful in terms of spending on Kiwi dairies when they start milking again in July and August.

While New Zealand might not be able to do enough in terms of limiting supply to save the dairy world, there is no doubt the timing now is certainly going to help.

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