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Transcript

In 10: Smooth sailing ahead? · Talking Dairy

• 0:01
  SPEAKER_01: Ki ora and welcome to Talking Dairy in 10.
• 0:04
  SPEAKER_01: I'm your host Jack McGowan from DairyNZ.
• 0:07
  SPEAKER_01: In this episode, we've got the latest analysis from the DairyNZ econ tracker update.
• 0:12
  SPEAKER_01: The good news, milk price forecasts are holding strong, the challenge, costs are still high.
• 0:18
  SPEAKER_01: So what does that mean for your business this season?
• 0:20
  SPEAKER_01: To break it down, we've got DairyNZ economist Ben Marmont with us.
• 0:25
  SPEAKER_01: Before we begin, a quick disclaimer.
• 0:27
  SPEAKER_01: The content in this material includes general commentary and market trends and should not be considered investment advice.
• 0:34
  SPEAKER_01: For the full disclaimer, visit dairynz.co.nz forward slash econtracker.
• 0:39
  SPEAKER_01: Okay, let's get into it.
• 0:41
  SPEAKER_01: Ben, the update says the sector is in a stable position.
• 0:45
  SPEAKER_01: What's behind that stability?
• 0:47
  SPEAKER_00: Thanks, Jack.
• 0:48
  SPEAKER_00: Great to be here.
• 0:49
  SPEAKER_00: So first off, we have farm working expenses remaining relatively consistent.
• 0:54
  SPEAKER_00: 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.
• 1:03
  SPEAKER_00: We're seeing interest payments coming down as the OCR continues to decrease, and we're expecting more cuts before Christmas.
• 1:11
  SPEAKER_00: Milk prices have also had no big change in recent months, with the futures market remaining relatively steady.
• 1:18
  SPEAKER_00: And when you take these three things together in net, there's no real big change.
• 1:22
  SPEAKER_00: They kind of balance each other out.
• 1:24
  SPEAKER_01: Cool.
• 1:25
  SPEAKER_01: Okay.
• 1:25
  SPEAKER_01: Well, that sounds really reassuring.
• 1:27
  SPEAKER_01: But let's talk about on-farm forecasted numbers, specifically farm working expenses and break-even milk price.
• 1:34
  SPEAKER_01: What are we seeing there?
• 1:36
  SPEAKER_00: Yep.
• 1:36
  SPEAKER_00: So the farm working expenses this season, we're forecasting at$5.91 per kilogram of milk solids.
• 1:43
  SPEAKER_00: For context, that's over half of your expected farm gate milk price.
• 1:49
  SPEAKER_00: In addition to farm working expenses, there's a whole lot of other expenses, such as interest, rent, depreciation, drawings, and tax.
• 1:58
  SPEAKER_00: And so once we add those on to the farm working expenses, we get to what we call the breake-even milk price.
• 2:04
  SPEAKER_00: 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.
• 2:19
  SPEAKER_01: Okay.
• 2:19
  SPEAKER_01: Is the breakeven milk price like an average across farms?
• 2:23
  SPEAKER_01: Like does it vary much between farmers?
• 2:26
  SPEAKER_00: Yes, it does.
• 2:27
  SPEAKER_00: 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.
• 2:38
  SPEAKER_00: You know, it's very farm specific and it depends on the way farmers have set up their businesses.
• 2:44
  SPEAKER_01: Right.
• 2:44
  SPEAKER_01: Okay.
• 2:44
  SPEAKER_01: And what's the forecast looking like for costs this season?
• 2:49
  SPEAKER_00: So digging into those farm working expenses a bit further, we can look at fertilizer, feed costs, electricity, and wages.
• 2:57
  SPEAKER_00: First up with fertilizer, we're seeing that fertilizer prices are starting to increase again slowly after two years of reductions.
• 3:07
  SPEAKER_00: Towards the end of July, we saw an increase in international urea prices, which have largely subsided.
• 3:14
  SPEAKER_00: Although these movements often take time to pass through to New Zealand markets.
• 3:18
  SPEAKER_00: 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.
• 3:25
  SPEAKER_00: 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.
• 3:32
  SPEAKER_00: Everyone's a bit cognizant that electricity prices have been increasing lately, and that's true on farm as well.
• 3:39
  SPEAKER_00: From 2019 to 2022, electricity was largely consistent on farm at 12 cents per kilogram of milk solids.
• 3:48
  SPEAKER_00: But in the last four seasons, we've seen that increase at one cent per milk solid per season.
• 3:54
  SPEAKER_00: So that's been really ticking along.
• 3:56
  SPEAKER_00: And then finally, we're seeing the standard tightness in the labor market continuing to put pressure on wages.
• 4:03
  SPEAKER_01: You mentioned the impact of interest rates on breakeven milk price.
• 4:07
  SPEAKER_01: What's happening there?
• 4:08
  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.
• 4:18
  SPEAKER_00: 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.
• 4:26
  SPEAKER_00: 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.
• 4:38
  SPEAKER_00: This lower debt level has also reduced interest payments.
• 4:42
  SPEAKER_00: 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.
• 4:50
  SPEAKER_01: And finally, what domestic and global factors are predicted that could affect milk prices in the coming months?
• 4:57
  SPEAKER_00: So starting off domestically, the sectors had a pretty strong start to the season.
• 5:02
  SPEAKER_00: So we saw June production up 18% compared to last June, July up 2%, and August up 2.5% as well.
• 5:11
  SPEAKER_00: And this was off the back of a strong end to last season, where May was up 8% production.
• 5:17
  SPEAKER_00: So strong signs, you know, as we progress into the business half of the season, I suppose.
• 5:24
  SPEAKER_00: Although an important caveat is that at this time last year, we were only 2.5% through total production.
• 5:31
  SPEAKER_00: So despite a strong start, we still have a long way to go.
• 5:34
  SPEAKER_00: Moving offshore, Europe is having really favorable conditions at the moment, and the US has a lot of product to move.
• 5:42
  SPEAKER_00: They're stepping up massively to the global markets.
• 5:45
  SPEAKER_00: 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%.
• 5:54
  SPEAKER_00: When you take these together, some commentators are concerned that supply might be beginning to outpace demand.
• 6:01
  SPEAKER_00: Although we haven't seen any suggested downturns via the Global Dairy Trade Auctions or the New Zealand milk price futures.
• 6:10
  SPEAKER_00: So we'll be watching with bated breath.
• 6:12
  SPEAKER_01: Before we wrap, Ben, how would you sum up the outlook in one sentence?
• 6:17
  SPEAKER_00: Well, it's still early doors.
• 6:19
  SPEAKER_00: The signs are that we're in for a pretty good season, all other things being equal.
• 6:24
  SPEAKER_01: Well, thank you very much, Ben, for sharing those insights.
• 6:27
  SPEAKER_01: It's clear that while costs are biting, strong milk prices and lower interest rates are helping keep things steady.
• 6:33
  SPEAKER_01: 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.
• 6:42
  SPEAKER_01: That's it for this episode of Talking Dairy and 10.
• 6:44
  SPEAKER_01: Matiwa.
• 6:51
  SPEAKER_01: Thanks for tuning in to this episode of Talking Dairy.
• 6:55
  SPEAKER_01: Make sure to hit follow so you can keep up to date with our latest episodes.
• 6:59
  SPEAKER_01: 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.
• 7:08
  SPEAKER_01: 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.
• 7:19
  SPEAKER_01: Matiwa, Modi Order, catch you next time.