- Production and trade
- International prices in 2002/03
- International prices out to 2007/08
- Milksolids Payouts
2.5 Dairy
Production and trade
The provisional numbers of dairy cows and heifers in calf or in milk from the census at June 2002 are 3.95 million. This was an increase of 3% (115,000 cows) from the previous season.
Over the medium term opening cow numbers (as at June) are projected to increase to 4.28 million at June 2007. This is an increase of nearly 330,000 head (8%) from June 2002. However the rate of annual increase in cow numbers is expected to decrease over this period, primarily due to lower expected farmgate payouts than farmers' received in the 2000/01 and 2001/02 seasons (years ended May 2001 and 2002 respectively). We had previously thought that the higher entry costs to dairying under Fonterra would lower herd expansion and the growth of the milk supply. However, MAF Policy's 2002 Dairy Farm Monitoring report showed that this was not necessarily the case, and that relatively few dairy farmers were altering their production decisions because of Fonterra's peak notes.2
New Zealand's total milk production for the season to 31 May 2003 (including milk used on farms and in the domestic liquid milk market) is estimated at approximately 1,179 million kilograms of milksolids (kgMS) (around 13.8 billion litres of liquid milk). As with the past three dairy seasons, this is again a record volume for the New Zealand industry. Of the total milk produced in the 2002/03 season, 1,135 kgMS (approximately 96%) is expected to be processed into dairy products. This is a 2.5% increase on the 2001/02 season's volume of milksolids processed.
While total milk production for the 2002/03 season is expected to be higher than last season due to the increased number of cows, average production per-cow is expected to be slightly lower due to dry climatic conditions in summer and autumn over many of the milk producing regions.
Growth in milk production over the outlook period to 2007/08 is expected to follow the same general trend as growth in cow numbers. However it is assumed that from 2003/04 onwards, average production per-cow returns to the underlying trend of 2% growth per season, due to genetic gain and improving farm management practices. Growth in the volumes of dairy products manufactured is generally expected to follow the increase in milk volumes.
We project that total milk production will reach 1.45 million tonnes of milksolids (approximately 16.9 million litres of liquid milk) by the 2007/08 season. Around 1.40 million tonnes of milksolids are expected to be used for processing, a 23% increase from 2002/03.
Provisional dairy product export volumes for the year to March 2003 were 1.83 million tonnes, worth $5.92 billion. This was a 21% rise in volumes from the previous year, as Fonterra ran down its milkpowder, casein and butter stocks, particularly from October 2002 to January 2003. However, due to lower international prices and a higher NZD, total export value was 21% lower than the previous year.
Because the stock run-down made export volumes significantly higher than what they otherwise would have been, export volumes for the year to March 2004 are forecast to be 2.4% lower, at 1.79 billion tonnes, and to be worth $5.59 billion. Export volumes are projected to increase out to just under 2 million tonnes in 2007/08, in line with increasing milk production, and be worth $7.54 billion.
In the year to March 2003 wholemilk powder (WMP) was the biggest export earner, returning $1.71 billion. It was also the product with the largest volumes exported, at 582,000 tonnes. Conversely, butter exports at $0.970 billion earned the least of the five main dairy products (WMP, skimmilk powder (SMP) cheese, butter and casein), despite having the second largest export volumes (equal with SMP) of 380,000 tonnes. In NZD terms, casein was the highest priced product, with an average export price for the year to March 2003 of $7,370 per tonne. Butter was the lowest priced, at $2,560 per tonne.
We project that by the year ended March 2008 these relative rankings (in volumes, values and prices) will not have changed, with the exception that SMP will displace butter in terms of the lowest total earnings. This is due to stronger growth in butter export volumes than in SMP exports volumes.
In the year to December 2002, the US was the largest export destination by value, earning $743 million. Earnings from the US were more than 75% higher than from the second largest market, Japan, which returned $417 million. Other significant markets were Mexico ($361 million), Belgium ($313 million), and The Philippines ($305 million). Dairy products were exported to nearly 150 countries in the year to December 2002.
International prices in 2002/03
Early in the 2002/03 season international market prices for WMP, SMP, cheese, butter and casein all fell to prices that were the lowest for over a decade. As prices reached a trough, the depleted stock levels of traders combined with the low prices resulted in a resurgence in demand for most products. WMP and SMP prices rebounded strongly, while butter prices recovered at a moderate rate. In comparison, due to high international stocks cheese prices remained at very low levels for around four months before showing any sign of recovery. When they did start to recover it was at a sluggish pace.
By April 2003 WMP and SMP prices had regained around half of the ground they had lost from the highs at the beginning of the 2001/02 season, while butter prices had made up around 50% of the gap between the price cycle's high and low points. Cheese prices were still languishing, having only recovered 33% of the distance between the price cycle's high and low points.
International prices out to 2007/08
International dairy product prices are forecast to continue to rise over the medium term as a result of recovering world growth, and an increase in demand for milk and dairy products in Asian and non-OECD countries as incomes rise.
One of the effects of the recent animal disease outbreaks in the EU was that consumers had been substituting cheese for red meat. This trend has now ended, removing a source of cheese demand and leaving the international cheese market in a temporary state of over supply. However, the recent increases in the international cheese price are an encouraging sign that the market may be starting to come back into balance. The lower volumes of Australian cheese expected on world markets next season by ABARE forecasters should also help underpin a recovery in cheese prices. Over the medium term, cheese prices are projected to continue to recover out to 2007/08 as demand for convenience and fast foods (which often contain cheese) increases, and nations that have not traditionally eaten dairy products increasingly adopt western diets.
Butter prices are expected to continue to rise over the medium term in line with the forecast recovery in world economic growth, but annual prices rises will be relatively small. While demand for butter from the high-quality restaurant sector is increasing, many of butter's traditional users are moving away from animal fats in favour of edible vegetable oils.
Both WMP and SMP prices are also expected to continue recovering over the medium term.
However, the US has recently proposed the cessation of the United Nation's (UN) food-for-oil scheme for Iraq, and announced its intention to provide humanitarian assistance to Iraq in the form of SMP. These developments present significant downside risks to WMP prices, and possibly also to SMP prices, in the short to medium term. While some of the SMP food aid may come from the USDA's Commodity Credit Corporation (CCC) stockpiles, it is likely that some supplies will also be purchased directly from manufacturers.
The US's proposals will displace the WMP that was until very recently being sent to Iraq as part of the UN scheme. New Zealand dairy companies had supplied a large portion of this WMP. If this outlet for WMP dries up, new markets for product will need to be found. This will significantly reduce the likelihood of a continued recovery in WMP prices in the short-term. In the medium term, however, manufacturers can adjust their product mix away from producing WMP to instead manufacture dairy products for which profitable demand exists.
The extent to which the US's announcements could negatively impact on SMP prices is unclear at this stage. It will largely depend upon the degree to which additional supplies of NDM are supplied as food aid to other countries besides Iraq, and displace commercial supplies from other nations.
Movements in casein prices are generally expected to follow movements in SMP prices, although casein prices tend to move more cyclically than SMP prices and casein is less prone to revisions in subsidy rates than SMP. Over the last year the USDA has been trying to sell off part of its SMP stockpiles to domestic dairy processors on the condition that it is used to manufacture casein - a product that the US currently does not make. The scheme has reportedly met with little success so far. This poor result, along with the potential for the use of part of the SMP stockpile as food aid for Iraq (among other countries) gives New Zealand's casein exports to the US market a temporary reprieve.
Milksolids Payouts
MAF Policy is currently forecasting an industry average payout of $3.59/kgMS for the 2002/03 season, 33% lower than the 2001/02 season's average payout of $5.32/kgMS. The main reasons for the lower payout are lower international dairy product prices during the season and less favourable exchange rates. From 2003/04 onwards payouts are forecast to improve in line with recovering world prices, and an industry average payout of $5.13/kgMS is projected for the 2007/08 season.
Fonterra has recently introduced a new foreign exchange policy where it will no longer try and estimate future exchange rates. Instead, Fonterra's earnings for the next 15 months will be 100% hedged against any change in the value of the NZD against the USD. The new policy is designed to give farmers greater certainty around Fonterra's payout forecasts, although they will still be subject to fluctuations in international prices and product mix changes. Based on interest rate and spot exchange rate forecasts supplied by The Treasury, MAF Policy is currently forecasting that Fonterra will face a lower annual average USD/NZD exchange rate in the 2003/04 season than in the 2002/03 season, but a higher annual average USD/NZD exchange rate than 2002/03 for the remainder of the forecast period.
Contact for further information:
Tony Wharton
Phone: (04) 498 9636
Email: tony.wharton@maf.govt.nz
