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Current as of 30/09/16 07:39PM NZST
Jamie Gray is a business reporter for the NZ Herald

Dairy rally could be 3 years away

US industry leader sees NZ forecasts of recovery this year as a bit optimistic, but is positive about long term
US dairy farmers think there's a good long term future, but there might be some time to wait before any turnaround.
US dairy farmers think there's a good long term future, but there might be some time to wait before any turnaround.

A recovery in the dairy sector could be two or three years away while low oil prices continue to weigh on the market, says United States Dairy Club chairman Ejnar Knudsen.

The not-for-profit club represents some of the largest US dairy producers and processors, market analysts, upstream agri-input companies and downstream food firms.

Knudsen, also chief executive of private equity group A-GR Partners, said he was not optimistic that a recovery was around the corner but he was nevertheless positive about the sector's long-term prospects.

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After leading a team of 70 US dairy farmers from the club around New Zealand -- hosted by ASB and ASB Agri Capital - Knudsen said it appeared locals were optimistic about an imminent turnaround.

"Everyone in the dairy industry around the world is losing money right now and I think that people here are a bit more optimistic that it is coming back this year," Knudsen said.

"My observation is that that is a little bit optimistic," he said.

"I think [the dairy industry] will come back, but it might be two or three years before it comes back."

United States Dairy Club chairman Ejnar Knudsen.
United States Dairy Club chairman Ejnar Knudsen.

Fonterra's latest forecast is for a farmgate milk price of $4.15 per kg, just over a dollar short of DairyNZ's estimated break-even point of $5.25 a kg. ASB Bank economists expect the milk price to come in at $3.90/kg this season, rising to $6/kg next season.

Farmers, after last year's very low milk price, face the prospect of two, or possibly three, successive years of negative returns thanks largely to low wholemilk powder prices.

KPMG, in its latest banking survey, said bank provisioning relating to dairy loans remained below levels seen in the years just after the global financial crisis. But KPMG said many of the banks had already begun a review of their largest exposures in a bid to identify and work with potential problematic loans.

Massey University banking expert David Tripe said while the banks might already be losing their sense of humour, calling in loans might not necessarily be the best solution.

Everyone in the dairy industry around the world is losing money right now and I think that people here are a bit more optimistic that it is coming back this year.
Ejnar Knudsen chairman of the US Dairy Club

"Rushing out to sell the farm does not necessarily solve the problem immediately, so I would expect [banks] to be starting to have some discussions with people and what kind of options that they might have," Tripe said.

In the US, farmers also face negative returns, although not as badly because domestic demand for fluid milk, cheese and butter is buoyant.

"We are not losing as much money as the New Zealand folks are, but New Zealand has [in the past], enjoyed better times because of those higher milk prices," Knudsen said.

New Zealand is the odd one out among producers because most of its milk production is exported, while other producers have an inward focus. In the European Union, production is still increasing, and US production is expected to be up by 1 per cent this year.

Knudsen said Europe's supply increase would prolong the downturn more than would be considered normal.

For us, the cost of milk production has come down a lot, so in a low oil price environment, the value of grass is less/
Ejnar Knudsen

Oil prices have almost halved to about US$32 a barrel in the past 12 months and are more than US$100 barrel short of their 2008 record high.

Low oil prices have a direct link to feed costs because of the amount of grain that is converted to biofuel.

Low feed costs have altered the cost structure considerably for NZ's competitors.

"For us, the cost of milk production has come down a lot, so in a low oil price environment, the value of grass is less," Knudsen said.

"The oil complex will cause the industry here in New Zealand to have less profit," he said. "It means the value of pasture is lower as a result."

On the positive side, he said the tide of public opinion around animal fats had turned in the US. "It used to be that eggs and butter were not seen as healthy but now in the US they are seen as healthy.

"Butter is a growth sector and the fastest-growing sector in milk is whole milk and not non-fat milk. That's a big change and it's a big, positive change for the dairy industry."

- NZ Herald

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