New Zealand’s dairy industry is sending mixed signals. While producers there are on track to set new milk production records this season, record-breaking levels of debt and a potential El Niño threaten to derail future expansion.
Looking at production first, favourable growing conditions that began last spring have positioned the New Zealand dairy industry for what could be its strongest production season ever, surpassing the 2014-15 peak. In October, New Zealand milk solids collections soared 6.5 percent to 271,080 metric tons (MT), besting 2014’s previous all-time record high of 270,839 MT.
“The giant leap in year-over-year output has added significance because October is New Zealand’s peak month for milk production,” says Sarina Sharp, analyst with the Daily Dairy Report. On a fluid basis, production climbed 5.8% to 3.3 million MT in October, matching the previous all-time record high hit in October 2014, according to data from the Dairy Companies Association of New Zealand.
At the same time, though, dairy producers in New Zealand hold record-breaking debt of $41.5 billion (NZ), a 1% increase from last year’s $41.1 billion, according to the Reserve Bank of New Zealand’s semi-annual Financial Stability Report. Because dairy producer incomes have been rising, the ratio of debt to income is slightly lower than it was in 2017, Sharp notes. The Reserve Bank of New Zealand estimates that dairy producers collectively hold 3.54 times more debt than their annual income, a slight improvement from the 3.55 ratio in 2017 and 3.6 in 2016, but much higher than most years, according to Sharp. “At current milk prices, dairy producer incomes remain inadequate to make a significant dent in debt loads,” she adds.
And that was before Fonterra once again lowered its estimate for this season’s milk prices. On December 5, Fonterra cut its 2018-19 price forecast for farmgate milk prices from October’s $6.25–$6.50/kg of milk solids to $6–$6.30 due to strong global milk production that has outpaced demand. The co-op also warned its producers that a potential El Niño could negatively impact production during the Southern Hemisphere’s summer.
Yet at this week’s Global Dairy Trade (GDT) auction, the weighted average index rose 2.2 percent, breaking a streak of six consecutive declines, due in large part to lower volumes of milk powders being offered by Fonterra. The gain also tracked a similar decline in the value of the U.S. dollar over the same period, according to ASB Bank senior rural economist Nathan Penny. “In particular, the Chinese yuan has lifted, making U.S. dollar-priced products cheaper for Chinese buyers,” Penny said. China is New Zealand’s largest trading partner.
New Zealand dairy producers have also been adding to their milk cow pasture holdings, which climbed 1.5% to an all-time high of 1.76 million hectares in the 2017-18 season, compared to the previous season. “Increased land holdings on the heels of a sustained downturn is testament to the optimism of dairy producers and their lenders,” says Sharp. However, that optimism could be tested, she adds.
Original article sourced from https://www.milkbusiness.com
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