USDA GAIN: Dairy and Products
22 October 2013
Total milk production is forecast for 2014 (the CY is the MY) at 20.6 million (M) metric tons (MT) which would be 4.5 percent ahead of the production expected for 2013. Milk production in New Zealand is not typically analyzed on a calendar-year basis. For example, the 2013/14 lactation season runs from July 2013 to June 2014. Similarly, the 2014/15 lactation season runs from July 2014 to June 2015. Quite often there may be different drivers acting as the main influencers of milk supply between production seasons.
For the first half of 2014 production is forecast to be eight percent ahead of the same period in 2013 because: Summer and autumn milk production is highly weather dependent, if rainfall is normal production is normal but if rainfall is below normal generally, production drops significantly which was the case in early 2013. At this stage the National Institute for Water and Atmospheric Research (NIWA) says the outlook for the climate is neutral between El Niño and La Niña weather patterns which would most likely lead to normal amounts of rainfall through into the autumn. In addition for the 2013/2014 production season farmers have been given forecasts that the milk price will be $NZ 7.60 to 8.60 per kilogram (kg) of milk solids up from an average of $NZ 6.15 per kg milk solids for the 2012/2013 season. This is likely to enable farmers to purchase supplementary feed to buffer any short term pasture deficits. In addition cow numbers being milked through this period are likely to be greater than 2013 because of an additional 40-50 new farms which came into production in 2013 and little pressure to dispose of cull cows until the end of the lactation season.
For the second half of 2014 production is forecast to be 2.2 percent greater than the same period in 2013. This is at the lower end of trend production increases of two percent to four percent per annum because: Firstly it is likely that the milk price will drop as global milk supply catches up with global demand. Higher supplies could result in a drop in the milk price to around $NZ 6 to 6.50/kg milk solids for the 2014/2015 production season. This will mean farmers will become cautious about additional spending especially for supplementary feed as it may not be profitable. Secondly environmental limits for nitrogen, phosphorus, and effluent discharges are becoming tighter. This coupled with water availability for irrigation becoming more restricted or costly to access is leading to increased caution being exercised by the banks with regard funding land conversions to dairy and farmers are not quite so confident to expand or develop.
Milk Production for 2013 is now estimated at 19.7MMT. While this is a 4.3 percent fall from the record year in 2012 it is 2.7 percent better than Posts previous forecast. Actual first half 2013 production was 7.6MMT which was one percent better than the previous estimate indicating the extensive drought did not do quite as much damage to milk supply as formerly estimated. For the second half 2013 it is now estimated that milk production will reach 12.1MMT which is a 1.9 percent year-on-year increase.
Actual production from June to the end September 2013 is approximately five percent ahead of the same period last year. Farmers after drying their cows off early in the drought to maintain condition benefited from a very mild winter and have capitalized on this with a flying start to the new production season. However the latest daily milk charts suggest that the peak production is being reached earlier and may be just less than the daily peak in 2012 which is leading to an expectation milk production for the rest of 2013(Oct to Dec) will be no higher than in 2012.
Total dairy production varies in sync with the milk supply and on that basis it is forecast that total production of all commodities will be 3.19MMT (including 410,000 MT of liquid milk) in 2014. This is four percent up from an estimated 3.07MMT (which includes 406,000 MT of liquid milk) in 2013. The mix of commodities produced varies according to the relative financial margins between the products which is dependent on the export price and the cost of manufacture for each product.
New Zealand is unique in that the peak milk supply month October is over twenty times the volume of the lowest supply month (June) which means the processors need a lot of spare capacity which may only be in use for 70 to 100 days a year.
Whole Milk Powder (WMP)
WMP is the key commodity produced in NZ comprising approximately 40 percent of the total production and in 2014 is likely to reach 1.3 MMT, up two percent from estimated production levels in 2013. New Zealand is an acknowledged leader in spray drying technology used to make milk powders and is constantly refining the process to make it more cost efficient in order to stay competitive in world markets. Apart from one 20,000 MT cheese plant, all the processing capacity added over the last decade has been in the form of powder driers -- usually dual purpose SMP or WMP systems. In New Zealand WMP is the most cost efficient product to manufacture.
Fonterra commissioned a new world leading 30 MT/hour capacity drier in August 2013, which will probably increase annual powder production capacity by at least 175,000 MT.
Each value/date point on the chart above is taken from a weighted average price achieved at the Global Dairy Trade (GDT) auction event on that date. The weighted average price is made up from the prices achieved for the particular product in up to six contracts which specify the shipping date for one to six months out from the auction date. To some extent the auction shows where purchasers think the market will be in up to six months time.
The chart above shows the main reason why the powder driers in the second half 2013 and on into the first half of 2014 will be aiming to maximize the manufacture of WMP. Export prices for WMP are at record highs and show no signs of abating in the near future. Even when the relative pricing of the main commodities based on the value of a ton of milk made in to each of the commodities was moving pretty well in sync from October 2011 through to March 2013 it was still more profitable to produce WMP because of the lower costs. Over the period from April 2013 until the present the relative values for each of the commodity lines have diverged significantly which means there is a double whammy effect for WMP profitability coming from receiving the highest value per ton of milk and having the lowest manufacturing costs.
Commentators in New Zealand think this situation will last into the second quarter of 2014. It has been brought about by global demand continuing to grow and between country tradable supply being compromised by the drought in New Zealand which reduced WMP production earlier in 2013; reduced production in Australia; slow production growth in the US; and sharply reduced domestic production in China
Even though WMP exports for the year-to-date August, 2013 were 85,783 MT less than the same period in 2012 which would indicate that production had slowed in the first six months of the year (generally manufacturers in NZ don’t build up stocks through the middle of the year); the market conditions outlined above; and the increased manufacturing capacity will probably mean that production will catch up to the previous year’s level and reach 1.275 MMT.
Skim Milk Powder (SMP)
For 2014 it is likely SMP production will show a marked upswing to reach 420,000 MT which would represent a 7.7 percent increase on the 2013 estimate of 390,000 MT. The production level in 2013 is likely to be down (-3.5 percent on 2012, and -2.5 percent on the previous forecast) because of the lowered milk supply January to June, 2013 and from July to December, 2013 with the emphasis on WMP because of its relative profitability, milk being diverted away from SMP/Fat production. On into 2014 it is likely the divergent relative prices between SMP/fat; cheese; and WMP will converge again which should mean that by the second half of 2014 SMP production will revert to trend increases and there will be a significant boost to production during that period.
Butter and Anhydrous Milkfat (AMF) Production
Total fat production is forecast to reach 525,000 MT (butter equivalents) in 2014. This would equate to a 3.8 percent increase year on year. The 2013 total now estimated at 506,000 MT is a reduction of four percent from 2012. The drop in production in 2013 can be put down to the influence of the drought in the first half of 2013 reducing milk supply and then the subsequent rise in the profitability for WMP which will divert milk supply away from cream and skim milk processing. However as stated above it is likely that the pricing for WMP will moderate in 2014 and the underlying demand for fat/cream products will re-assert itself during the year which should see the forecast production increase achieved.
AMF production is assuming greater importance in overall cream processing. Over 2011 and 2012 AMF production comprised around 40 percent of the total, in the YTD 2013 it is running at over 45 percent, having come from around a third of total fat/cream production a decade ago. Most NZ cream plants have the flexibility to switch easily from butter to AMF production via the Anmix process.
The negative connotations around dietary fat are changing somewhat and consumer tastes and preferences are now favoring natural ingredients. Among the developing nations there isn’t anywhere near the same level of historical bias away from dietary fat. This is fueling a resurgence of demand for fat/cream products especially in baked goods and food service in the developing nations. AMF is a suitable ingredient for these consumer products and can be handled more easily in the logistics chain than butter. The longer term outlook is for AMF/butter production to carry on steadily increasing.
It is forecast Cheese production is going to be reasonably stable at 320,000 MT in 2014 and 319,000 MT in 2013. Generally cheese has been more expensive to produce than the other commodities and the net margins haven’t justified production increases. Fonterra inherited ten legacy cheese plants when it was formed and one additional plant has been built by Open Country Dairy (27,000 MT capacity) since then. In the peak milk production months of October through December when the powder plants are working to capacity the cheese plants are used to process the peak milk supply. Nearly all the cheese production would come under the natural cheese category with only approximately seven percent of total production processed cheese and a further eight percent categorized as powdered or grated cheese. The vast majority of the natural cheese production is cheddar which is exported on a business to business basis to be further processed.
However the combination of : new processing technologies being employed which are leading to better cost efficiencies; increasing demand from the developing economies for ingredient cheese for processing; and better pricing for the whey by-products is likely to see the continuation of the reversal to the long term trend of stable to declining cheese production. Looking to the future there is likely to be production growth as the milk supply continues to grow and the dynamics mentioned above really come in to play.
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