US-based expert bullish on future of dairy industry

Brian Rice is in NZ talking to farmers about managing their risk. Photo / Michael Craig

NZX's planned new milk price futures contract can help bring stability to a dairy sector being hit by low returns, says visiting Chicago-based commodities specialist Brian Rice.

Rice, who heads up advisory firm Rice Dairy, said the contract, which the NZX plans to launch next month, could be beneficial for farmers and their bankers alike.

"If we get this thing right, it will make for a much more durable and stable dairy industry in New Zealand."

Fonterra's farmgate milk price forecast for the current season sits at $3.90 a kg of milksolids - well below the breakeven point of $5.25 a kg.

Prices, which in 2014 hit a record $8.40 a kg, have become increasingly volatile and farmers no longer have Fonterra's guaranteed milk scheme to offset their risk.

Rice and international banker JT McFarlane are in New Zealand at the invitation of the Fonterra Shareholders Council to talk to farmers about managing their risk.

"I see a slow but steady adoption so I do think that [futures contract] volume will grow, year after year, as it ripples through New Zealand," Rice said.

"The design of the contract is good, solely because it matches the risk of the New Zealand dairy farmer."

Rice said there was a misconception that Fonterra should take care of the risk for farmers.

"The reality is that they [farmers] own that risk and, further, New Zealand is totally at the mercy of world markets."

He said the contract would also be important for farm lenders - if more dairy farmers managed their risk properly, the less risky their debt would be.

Rice said he was convinced the sector had a bright future, even though it is struggling with the issue of overproduction - particularly from the European Union.

"The market is oversupplied and prices are reflecting that," he said.

"Low prices means increased demand and incentivise producers to slow down and ultimately those forces will kick in and the market will cycle the other way.

"It's possible that that could happen by the end of 2016, but I don't think that we will get an up-tick in the next couple of months," he said.

"Over the fourth quarter of this year and the first quarter of 2017, I would not want to be short [in the market]."

Rice added there was more upside risk than downside risk for dairy.

Rice said the factors that produced the "white gold" days of 2013/14, which saw whole milk powder prices rally to over US$5000 a tonne - were still there - urbanisation, population growth, and increased awareness about proteins and fats.

"Production will slow down a bit and demand from places like Russia and China will kick back in," be said. "I think in the big picture, on a multi-year timeframe, I am bullish on dairy," he said.

In the US, there had been a big shift in sentiment in favour of animal fats.

Consumers were buying more butter and whole milk consumption was enjoying double-digit growth.

In the EU, production growth was being driven by the momentum created by the lifting of quotas last year.

"I think that low prices are starting to pull some of the shine off that."