How much is enough?

How much is enough ?

Comment by www.agridata.co.nz

The rising prices for skim milk powder have reached a stunning milestone this week – prices in US$ reached US$4,150, exactly twice the level they were the same week last year.

In NZ$. skim milk powder prices are +72% ahead of the same time last year.

The level of increases are less for whole milk powders, and a lot less for cheddar cheese, while there has been no effective increase in butter prices.

The powder price increases are spectacular, and a review of the fundamental forces driving them higher is in order.

And such a review can help farmers assess whether the Fonterra payout indication, from $4.15 to $4.35 is a fair change.

Many factors drive the Fonterra payout decision, and product prices are just one of them. But it should be an important one.

Organisational efficiency, and product mix issues, will be the other two drivers, and these are a reflection of management skills.

Product prices reflect the impacts of international consumer demand, investment decisions by competitors, and environmental (weather) effects.

And, between management and the market is the NZ$ exchange rate which modifies all outcomes before the returns are received by the Fonterra shareholder.

The rise has been so rapid since October, only product uncommitted has had an influence in this year’s payout. Our sources suggests a 20c top-up, fairly reflects the value of uncommitted product.

With now a +100% rise in US$ skim milk powder prices Fonterra’s optimism for a +$5 payout is driven by the following facts….

India has recently banned exports of their domestic milk powder production to try and stem the product price rises for consumers. Rising income levels and dietary expectations are putting real price pressure on supply with demand running hot.

US milk prices are rising fast, not only through continuing local demand, but heightened export demand, and tight local supply. Regulation is putting cost pressure on local suppliers.

UK demand is reported as being ‘insatiable’ for milk powders, with retailers raising prices being paid to milk suppliers significantly, just to ensure adequate supply for their retail customers. Prices are rising in the rest of Europe as well.

China demand continues to build – and even increases that are ‘small’ in that market, translate into enormous upward price pressure in international markets.

Dairy giants from all over the world are rushing in to participate in that Chinese demand, Fonterra among them. New dairy, and powder production capacity is being planned, announced and brought on-stream monthly. Local Chinese companies are responding themselves, and probably leading the investment charge both in production and processing.

Fonterra is also looking beyond the current powder opportunities, and noting that “thirsty Chinese are getting tired of milk powder from New Zealand and want the real thing.”

Demand in South America and in Africa is also rising.

Fonterra needs to reassure shareholders that they have the right balance of production capacities that will deliver the best revenue and margin outcomes in the intermediate future.

Do we have too much churning capacity? Not enough drying capacity?

Are butter markets about to yield much higher prices soon? Will the recent growth in cheese prices justify the current investments in these products?

And, do we have enough exposure to China and India – will we benefit fully from their rapidly rising changes in dietary demand?

Perhaps it is ‘too easy’ to look at the fast-changing international developments that make the headlines and expect they will translate to rising returns at the farm gate. But, after all, that is what Fonterra was expected to deliver.

Producers need strong stable prices to continue, which is critical when you realise that central government regulators continue to impose significant costs and restrictions on milk producers.

Sadly, bureaucrats are conspiring to raise the cost base of the whole milk-production business. Higher returns are essential just for survival. For all our sakes, let hope these current product price rises are permanent.

Without them, dairy farmers would be in the very dire situation of their sheep and beef cousins.

ENDS

www.agridata.co.nz

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