Talking Dairy

In 10: Smooth sailing ahead?

• DairyNZ

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Milk price forecasts are holding steady, but costs remain high. What does that mean for your bottom line this season? DairyNZ economist Ben Marmont unpacks the latest Econ Tracker update and what watch for in the months ahead.

 

For more information: 

DairyNZ Economic Tracker tool Access here 

Article: Dairy sector outlook remains steady Read more

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SPEAKER_01:

Ki ora and welcome to Talking Dairy in 10. I'm your host Jack McGowan from DairyNZ. In this episode, we've got the latest analysis from the DairyNZ econ tracker update. The good news, milk price forecasts are holding strong, the challenge, costs are still high. So what does that mean for your business this season? To break it down, we've got DairyNZ economist Ben Marmont with us. Before we begin, a quick disclaimer. The content in this material includes general commentary and market trends and should not be considered investment advice. For the full disclaimer, visit dairynz.co.nz forward slash econtracker. Okay, let's get into it. Ben, the update says the sector is in a stable position. What's behind that stability?

SPEAKER_00:

Thanks, Jack. Great to be here. So first off, we have farm working expenses remaining relatively consistent. We're still seeing some increases, as with all costs that tend to always go up, but they're increasing a lot slower than previous seasons. We're seeing interest payments coming down as the OCR continues to decrease, and we're expecting more cuts before Christmas. Milk prices have also had no big change in recent months, with the futures market remaining relatively steady. And when you take these three things together in net, there's no real big change. They kind of balance each other out.

SPEAKER_01:

Cool. Okay. Well, that sounds really reassuring. But let's talk about on-farm forecasted numbers, specifically farm working expenses and break-even milk price. What are we seeing there?

SPEAKER_00:

Yep. So the farm working expenses this season, we're forecasting at$5.91 per kilogram of milk solids. For context, that's over half of your expected farm gate milk price. In addition to farm working expenses, there's a whole lot of other expenses, such as interest, rent, depreciation, drawings, and tax. And so once we add those on to the farm working expenses, we get to what we call the breake-even milk price. And for the 25-26 season, we're forecasting an$8.66 per kilogram of milk solids, which is a small increase on the 24-25 forecast of$8.45 per kilogram of milk solids.

SPEAKER_01:

Okay. Is the breakeven milk price like an average across farms? Like does it vary much between farmers?

SPEAKER_00:

Yes, it does. So the breakeven milk price is very much like an industry average, and every farm's very different, especially when we start talking about interest and rent drawings. You know, it's very farm specific and it depends on the way farmers have set up their businesses.

SPEAKER_01:

Right. Okay. And what's the forecast looking like for costs this season?

SPEAKER_00:

So digging into those farm working expenses a bit further, we can look at fertilizer, feed costs, electricity, and wages. First up with fertilizer, we're seeing that fertilizer prices are starting to increase again slowly after two years of reductions. Towards the end of July, we saw an increase in international urea prices, which have largely subsided. Although these movements often take time to pass through to New Zealand markets. Moving along to feed, we're coming out of a period of reasonably low feed prices, but we're starting to see these tick back up. It remains to be seen how far these prices run up, especially in the South Island where a lot of feed is being bought in at the moment. Everyone's a bit cognizant that electricity prices have been increasing lately, and that's true on farm as well. From 2019 to 2022, electricity was largely consistent on farm at 12 cents per kilogram of milk solids. But in the last four seasons, we've seen that increase at one cent per milk solid per season. So that's been really ticking along. And then finally, we're seeing the standard tightness in the labor market continuing to put pressure on wages.

SPEAKER_01:

You mentioned the impact of interest rates on breakeven milk price. What's happening there?

SPEAKER_00:

Yep, so we've seen interest payments on average fall to$1.12 per kilogram of milk solids from a peak of about$1.63 in 23-24. And as that OCR, the official cash rate, has started to decrease, we're seeing that pass through and people pay less and less interest. On top of lower interest rates, the sector has also repaid a significant amount of debt in recent years, paying back almost half a billion dollars in the last two years. This lower debt level has also reduced interest payments. That said, dairy debt has started increasing in the last six months, although it's still less than the total debt held a year ago.

SPEAKER_01:

And finally, what domestic and global factors are predicted that could affect milk prices in the coming months?

SPEAKER_00:

So starting off domestically, the sectors had a pretty strong start to the season. So we saw June production up 18% compared to last June, July up 2%, and August up 2.5% as well. And this was off the back of a strong end to last season, where May was up 8% production. So strong signs, you know, as we progress into the business half of the season, I suppose. Although an important caveat is that at this time last year, we were only 2.5% through total production. So despite a strong start, we still have a long way to go. Moving offshore, Europe is having really favorable conditions at the moment, and the US has a lot of product to move. They're stepping up massively to the global markets. So the US has doubled their butter export since the start of the year, and they've increased their export of whole milk powder by 40%. When you take these together, some commentators are concerned that supply might be beginning to outpace demand. Although we haven't seen any suggested downturns via the Global Dairy Trade Auctions or the New Zealand milk price futures. So we'll be watching with bated breath.

SPEAKER_01:

Before we wrap, Ben, how would you sum up the outlook in one sentence?

SPEAKER_00:

Well, it's still early doors. The signs are that we're in for a pretty good season, all other things being equal.

SPEAKER_01:

Well, thank you very much, Ben, for sharing those insights. It's clear that while costs are biting, strong milk prices and lower interest rates are helping keep things steady. If you want to check out the numbers for yourself, head to dairynz.co.nz forward slash econtracker and you'll find all the latest data there. That's it for this episode of Talking Dairy and 10. Matiwa. Thanks for tuning in to this episode of Talking Dairy. Make sure to hit follow so you can keep up to date with our latest episodes. You can also keep up with DairyNZ News on Facebook, Instagram, and LinkedIn, or go to our website and sign up for our fortnightly DairyNZ News emails. As always, if you have any feedback on this podcast or have some ideas for future topics or guests to have on the show, please email us at talkingdairy at dairynz.co.nz. Matiwa, Modi Order, catch you next time.