Cloud over milk prices 'will lift'
Dairy farmers take heart - Chinese demand and dairy prices will bounce back towards the end of the year.
That is the reassuring assessment from Myfarm CEO Andrew Watters whose company has 47 dairy farms under management across the country.
His optimism is based on recent reports from Goldman Sachs and the United States Department of Agriculture (USDA) forecasting a 30-50 per cent higher Chinese demand for whole milk powder this coming year.
"The fundamental drivers of good farm returns have not changed in the past few weeks. The fluctuation in milk prices between last season and this is just another example of the volatility that New Zealand dairy farmers have to manage," Watters says.
"Well run dairy farms with moderate debt and clear business plans can still generate good levels of operating profit at payouts $6.50 per kilogram of milksolids and above."
Many analysts are predicting the payout for next season will drop as low as $6/kg milksolids.
Half the dairy debt of $32 billion is held by 10 per cent of farmers, who will be hard hit by price falls.
Since February 18 the average whole milk powder price has fallen by 38 per cent, after reaching record highs.
Watters said although China had stockpiled milk powder, they would soon have exhausted those supplies.
Rising feed prices, food safety scares and foot and mouth disease problems meant their own farmers could not meet the expected demand. Chinese milk prices are now 30 per cent above the world average.
He said demand would not drop for another five years, guaranteeing prices would remain high.
US and EU farmers are potential competitors for the Chinese market but their costs of production are significantly above New Zealand's because of their more expensive confinement systems.
Westpac chief economist Dominick Stephens agreed with Watters' analysis.
"Temporarily the wholesalers have to clear their stocks before buying again and that temporarily depresses the price.
"Dairy auction prices will be down for the next two auctions till the last quarter of the year, but then we'll expect a substantial upturn," Stephens said.
Watters also discounted the EU and US as competitors in the whole milk powder market because they would have to switch from producing skim milk powder and cheese, and at present they did not have the capacity to process whole milk powder.