NZ: Farm-gate conditions in the dairy sector remain favourable - ANZ

Con Williams Rural Economist at ANZ, notes that the conditions for farm-gate returns in the dairy sector remain favourable as broadly, they see global milk supply growing at, or slightly below, trend with a number of country-specific limitations and the marginal cost of production lifting (i.e. feed, energy and wages).

Key Quotes

“This should support the durability of the current pricing cycle, but as always, weather developments – especially in Europe and New Zealand – will be important in determining the final outcome. The other support factor is forecast solid demand from a range of key markets.”

“In 2018/19 we have the NZD/USD averaging 0.67, but given recent ranges and foreign exchange hedging considerations, the actual effective rate is likely to be closer to 0.70. With whole milk powder holding in a broad USD2,800 to USD3,300/t range, New Zealand SMP continuing to attract a premium versus other suppliers, and milkfat prices set to follow a similar pattern to 2017/18, this gives a farm‑gate milk price range of mid-to-high $6/kg MS. At this stage we are more inclined toward an opening milk price of $6.75/kg MS in 2018/19.”

“Combined with a likely upgrade to the 2017/18 milk price of $0.05‑$0.10/kg MS, modelled cash-flow for the average fully shared Fonterra supplier is indicating around $7/kg MS in 2018/19. While low operating costs have unwound somewhat since the downturn in returns, robust farm-gate pricing points towards a solid earnings backdrop of $1,750/ha, versus a 10-year average of $950/ha.”