- Outlook for 2003/04 to 2006/07
- Latest situation and outlook
- Table 1: Dairy situation and outlook
- Table 2: Farmgate milksolids payout: baseline and alternative exchange rate scenarios
Dairy
Outlook for 2003/04 to 2006/07
Production
Latest situation and outlook
The 2003/04 dairy season is estimated by MAF to have opened with 3.94 million cows and heifers in milk or in calf, up 2 percent from the previous season. Opening milking cow numbers are projected to continue to rise over the outlook period, but at a slower rate than in previous seasons. This is because Fonterra Co-operative Dairy Group Ltd (Fonterra) is expected to face a progressively higher NZD/USD exchange rate over the next two dairy seasons under its foreign exchange hedging policy, despite the expected depreciation of the NZD/USD spot rate over this time.
Under Fonterra's policy, 100 percent of the company's projected foreign exchange risk is hedged on a rolling basis 15 months into the future. This effectively delays for 15 months the impact of the recent sharp appreciation of the NZD against the USD on Fonterra suppliers' payouts. The forecast lower payouts resulting from this (particularly in 2004/05 and 2005/06) make the expansion of production from existing farms and the conversion of new farms less profitable than in past seasons.
The 2003/04 production season experienced a wetter-than-usual spring, with pasture growth in many areas adversely affected around the peak of the season (the day when milk production reaches its highest level). Summer began warm, but a very unsettled February resulted in extremely wet conditions and flooding in the lower North Island. The upside of this late summer rainfall was that it largely reversed the severe soil moisture deficits that had been constraining milk production in the east of the South Island and Northland.
Despite the adverse conditions in some areas, New Zealand's total milk production for the 2003/04 season is estimated to be approximately 1,240 million kilograms of milksolids (kgMS), around 4 percent higher than the previous season. The volume of dairy products manufactured during the season is estimated to be around 5 percent higher than the previous season.
Over the outlook period the annual rate of growth in milk production is expected to be higher than the rate of growth in milking cow numbers. This is due to the assumption that the underlying trend of a 2 percent annual increase in milksolids production per cow continues. Growth in the volumes of dairy products manufactured is expected to follow the same general trend as growth in milk production.
Significant changes from SONZAF 2003, and reasons for the changes
Total milksolids production is now higher in 2003/04 due to better than expected late summer/early autumn production. Milksolids production is now lower for the remainder of the outlook period due to lower projected milking cow numbers, which is the supply response to lower expected milksolid payouts.
Exports and product prices
Latest situation and outlook
Export volumes for the 2003/04 dairy season are estimated to fall by around 2 percent from the previous season, to 1.80 million tonnes. This is because exports volumes in 2002/03, which were up 20 percent from the 2001/02 season, were `inflated' as Fonterra significantly reduced its inventory. Over the outlook period growth in export volumes is projected to follow growth in the volumes of dairy products manufactured, to reach around 2.00 million tonnes in 2006/07.
World prices for cheese and butter rose over the 2003/04 season to reach relative highs, due both to a tight supply situation (Australian exports were lower as its industry recovers from drought) and the weaker USD, which made USD price-denominated products cheaper in countries where the currency had appreciated against the USD.
Skimmilk powder (SMP) price rises were constrained by the US Department of Agriculture (USDA) lowering the US's domestic support price for SMP to USD1820 per tonne in July 2003, effectively capping the international SMP price at this new level. Rises in the world price above this level would encourage unsubsidised exports from the US, which in turn would lower prices below the support price making further exports unprofitable.
Wholemilk powder (WMP) and SMP prices usually follow fairly similar price tracks, and this relationship continued over the 2003/04 season with WMP prices rising slowly in the first part of the season before plateauing.
Casein prices recovered slowly over the season, but remain below the average price of the past 5 years. Because the US is one of the major importers of casein, demand for casein has not been positively affected by the depreciation of the USD, unlike cheese and butter.
Prices for dairy products are generally expected to remain strong over the outlook period. Strong growth in demand for dairy products in non-OECD nations is expected, arising from growing per-capita incomes, changes in lifestyle and diet, population growth, urbanisation and the increasing presence of western retail chains.
While total demand for cheese is forecast to increase over the outlook period, the current high prices are unlikely to be sustainable in the medium term, as they are largely due to a temporary shortage of cheese exports from Australia, and the weaker USD.
Butter prices are expected to remain relatively firm over the medium term, although butter is expected to face declining demand from many of its traditional users, who are increasingly switching to edible oils.
International SMP prices are assumed to remain capped by the US's domestic support price, and this may induce producers to alter their product mix away from SMP in favour of WMP. If this occurs, the additional supplies of WMP on the world market are likely to constrain increases in WMP prices over the outlook period.
Uncertainty over the continued sales of WMP into Iraq following the cessation of the United Nations' Oil-for-Food Programme in November 2003 was previously affecting the outlook for WMP prices. As the transition from the Oil-for-Food Programme to other arrangements for imports is now occurring, demand for WMP in Iraq is likely to continue to remain strong, and this particular risk to WMP trade and prices has dissipated.
Casein prices are projected to continue to recover over the medium term as a result of increasing economic growth, mainly in the US.
The recent announcement by the US International Trade Commission (USITC) following their investigation into imports of milk protein concentrates (MPC) into the US will come as welcome news to New Zealand's MPC exporters. The USITC found that the increased imports of MPC into the US have not significantly hurt the prices paid for American milk and have not, therefore, done a lot of damage to US producers. As was reported in SONZAF 2003, the National Milk Producers Federation has claimed that increased imports of milk protein products have led to lower usage of domestic milk proteins, increased government stocks of SMP and reduced the incomes of US dairy farmers.
Significant changes from SONZAF 2003, and reasons for the changes
Cheese prices are lower in 2003/04 than expected, but higher over the rest of the outlook period, and butter prices are higher in all outlook period years. These changes are due to more accurate estimates of prices being made as the season progressed.
Export volumes are generally lower over the outlook period due to lower milksolids production.
Farmgate payouts
Latest situation and outlook
The industry weighted-average payout to farmers for the 2003/04 season, net of an industry good levy of 3.4 cents per kgMS, is estimated to be $4.12 per kgMS. This is 14 percent higher than the 2002/03 season's average net payout, due to cost reductions within Fonterra and higher international dairy product prices. The latter, however, are partially offset by a higher average NZD/USD exchange rate.
The industry weighted-average payout is forecast to fall to $3.11 per kgMS in 2005/06 due mainly to the delayed impact on Fonterra of the current high NZD. Over the remainder of the outlook period, payouts are projected to increase from this level due largely to the assumption that Fonterra will face a lower hedged exchange rate.
Table 1: Dairy situation and outlook
| May year | Units | 2002 | 2003 | 2004e | 2005f | 2006z | 2007z |
|---|---|---|---|---|---|---|---|
| Cows and heifers in calf or in milk1 | mil | 3.75 | 3.84 | 3.94 | 4.01 | 4.07 | 4.13 |
| Total dairy cattle1 | mil | 4.85 | 5.16 | 5.29 | 5.39 | 5.47 | 5.55 |
| Total milk produced | mil t | 13.9 | 14.4 | 15.0 | 15.5 | 16.1 | 16.7 |
| Milksolids produced | mil t | 1.15 | 1.19 | 1.24 | 1.29 | 1.34 | 1.38 |
| Milksolids processed | mil t | 1.11 | 1.15 | 1.20 | 1.24 | 1.29 | 1.34 |
| Dairy products exported | |||||||
| Butter and cream products | 000t | 331 | 373 | 387 | 394 | 407 | 421 |
| Cheese | 000t | 277 | 293 | 292 | 297 | 316 | 336 |
| WMP | 000t | 453 | 600 | 571 | 594 | 610 | 626 |
| SMP and BMP2 | 000t | 300 | 352 | 361 | 417 | 434 | 451 |
| Casein and protein products | 000t | 110 | 146 | 115 | 120 | 124 | 127 |
| International dairy product prices (spot rates) | |||||||
| Butter | USD/t FOB | 1,266 | 1,174 | 1,510 | 1,510 | 1,470 | 1,490 |
| Cheese | USD/t FOB | 2,070 | 1,676 | 1,910 | 2,190 | 2,080 | 2,100 |
| WMP | USD/t FOB | 1,716 | 1,525 | 1,830 | 1,830 | 1,820 | 1,850 |
| SMP | USD/t FOB | 1,747 | 1,489 | 1,780 | 1,790 | 1,790 | 1,790 |
| Casein | USD/t FOB | 4,599 | 3,603 | 3,950 | 4,250 | 4,380 | 4,480 |
| Farmgate payout - baseline scenario | |||||||
| NZD/USD spot rate | USD | 0.425 | 0.514 | 0.634 | 0.662 | 0.630 | 0.583 |
| NZD/USD Fonterra hedged rate | USD | 0.428 | 0.475 | 0.520 | 0.576 | 0.637 | 0.610 |
| Fonterra payout3 | $/kgMS | 5.30 | 3.60 | 4.12 | 3.47 | 3.07 | 3.33 |
| Average Dairy Company payout3 | $/kgMS | 5.32 | 3.62 | 4.12 | 3.49 | 3.11 | 3.38 |
Sources: Fonterra Co-operative Group Ltd, Westland Co-op Dairy Company Ltd, Tatua Co-op Dairy Company Ltd, Statistics New Zealand, USDA, OECD and MAF
1Opening numbers as at 30 June.
Statistics New Zealand census data as at June 2002; MAF estimates, forecasts and projections thereafter.
2Includes nutritional powders.
3Net of Industry Good deduction/levy (3 cents/kgMS in 2002/03, 3.4 cents/kgMS thereafter).
Figures may not add or reconcile due to rounding.
Significant changes from SONZAF 2003, and reasons for the changes
Payouts for all years are lower than in SONZAF 2003 primarily due to higher exchange rate assumptions over the outlook period for both the spot exchange rates and Fonterra's hedged exchange rates.
Alternative exchange rate scenario analysis
The USD is the benchmark currency for international dairy trade. NZD/USD spot exchange rate assumptions used in the baseline forecasts generally are closer to the high scenario spot exchange rates over the outlook period, although they are roughly equidistant between the high and low scenario rates for the first year of the outlook. Due to Fonterra's hedging policy, the effects on payouts of changes in spot exchange rates is effectively delayed for 15 months. However, this does not apply to export values, which are valued using the exchange rate of the day.
Table 2: Farmgate milksolids payout: baseline and alternative exchange rate scenarios
1Net of Industry Good deduction/levy (3 cents/kgMS in 2002/03, 3.4 cents/kgMS thereafter) Compared with the baseline payout forecasts, under the high exchange rates scenario Fonterra's farmgate payouts are progressively lower over the outlook period. The difference ranges from 5c per kgMS lower in 2004/05 to 21c per kgMS lower in 2006/07. Differences in the industry average payouts between the baseline forecasts and the high scenario are very similar to those for Fonterra's payout. Compared with the baseline payout forecasts, under the low exchange rates scenario Fonterra's farmgate payouts are progressively higher over the outlook period. The difference ranges from 8c per kgMS higher in 2004/05 to 77c per kgMS higher in 2006/07. As with the high scenario, differences in the industry average payouts between the baseline forecasts and the low scenario forecasts are very similar to those for Fonterra's payout.
Monitoring and Evaluation
May year
Units
2002
2003
2004e
2005f
2006z
2007z
Farmgate payout - baseline exchange rate scenario
NZD/USD spot rate
USD
0.425
0.514
0.634
0.662
0.630
0.583
NZD/USD Fonterra hedged rate
USD
0.428
0.475
0.520
0.576
0.637
0.610
Fonterra payout1
$/kgMS
5.30
3.60
4.12
3.47
3.07
3.33
Average Dairy Company payout1
$/kgMS
5.32
3.62
4.12
3.49
3.11
3.38
Farmgate payout - higher exchange rate scenario
NZD/USD spot rate
USD
0.425
0.514
0.636
0.682
0.641
0.596
NZD/USD Fonterra hedged rate
USD
0.428
0.475
0.520
0.576
0.653
0.624
Fonterra payout1
$/kgMS
5.30
3.60
4.12
3.42
2.97
3.11
Average Dairy Company payout1
$/kgMS
5.32
3.62
4.12
3.44
3.01
3.17
Farmgate payout - lower exchange rate scenario
NZD/USD spot rate
USD
0.425
0.514
0.633
0.634
0.565
0.539
NZD/USD Fonterra hedged rate
USD
0.428
0.475
0.520
0.576
0.620
0.550
Fonterra payout1
$/kgMS
5.30
3.60
4.12
3.54
3.40
4.10
Average Dairy Company payout1
$/kgMS
5.32
3.62
4.12
3.56
3.45
4.13 
Contact for Enquiries
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