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Dairy Australia - Market News


28 October 2014

Dairy Australia Fortnightly Update - 17 October 2014Dairy Australia Fortnightly Update - 17 October 2014


Dairy Australia - Market News

Global Developments

There had been speculation that more stability would be seen in the market with this week’s GlobalDairyTrade (GDT) event 126, and the auction concluded 1.4% higher (for an average of $2,640/t, up from $2,599/t two weeks earlier). The index found some support from WMP (up 3.1%): Fonterra announced last week that they plan to reduce their offering of WMP sold on GDT over the next 12 months by 7%. Increases were also seen in AMF (+7.4%), butter (+3.9%) and Sweet Whey Powder (+4,3%), while SMP bucked the trend, falling a further 3.6%. Product sold totalled 50,816 tonnes (down from 55,057 at the previous event), and, while the number of participating bidders remained unchanged, the number successful fell, resulting in a slight increase in the average sold quantity per purchaser.

Full results at www.globaldairytrade.info While the EU as a whole was under quota for the 2013/14 production year, eight member states were fined over €400 million for exceeding their individual quotas. Germany incurred 40% of this (local analysts suggest the country is on track to nearly double its overrun in the current year), while the Netherlands accounted for around 30%. Following the trend of recent years, United Kingdom production was well under quota, and several rounds of farmgate price cuts have already been announced this season, attributed by processors to falling dairy commodity prices. At least one UK farmer group has recently staged protests in response to the most recent reductions. Those concerned about declining US milk to feed price ratios will have taken note of the latest WASDE (World Agricultural Supply and Demand Estimates) report released on October 10th, which reduced the estimate for 2014/15 world wheat ending stocks. Despite recent wet weather in the US Midwest slowing the US corn harvest, pushing prices up from recent lows, the WASDE global maize production estimate was increased.

The Australian Front

Local media have reported a Tasmanian-based party is involved in developing a complex deal involving the purchase of around 50 farms in south-western Victoria. Reports also suggest that the developer Mr Troy Harper (Managing Director, Linear Capital) stated a “major dominant state-owned Beijing-based (food industry) player” is backing the effort; and that the enterprise being developed is aiming to secure a milk supply of up to 500 million litres, with the establishment of two new local manufacturing facilities confirmed to The Weekly Times. According to the latter, the state government will lease, as part ofthe deal,the unused Glenormiston agriculture college ‘to train staff for the cluster of farms.’ Based on the number of farms involved, the 500 million litre volume is an ambitious target unless the farms procured are amongst the nation’s largest in terms of raw milk output. And based on more typical farm sizes (and existing farm systems), around 50 farms combined would be more likely to deliver between 200 million and 250 million litres. So the 500 million litre target (let alone the stated 500 million +50% incremental growth aspirations) implies the operators applying higher than existing stocking rates (implying changes to farm systems)— unless they are larger, higher performing farms.

Achievement of the 500 million litre target would take the entity’s potential share of the region’s total milk pool (based on FY14 total regional volume of 2.1 billion litres) from around a 10% to a 24% share. With over 10 companies already competing for milk supply in Western Victoria, premiums have been on offer from more recent entrants, already challenging the major incumbents with significant manufacturing assets in the region. However, if this 10-24% volume share is converted into product for customers of a ‘state-owned Beijing-based (food industry) player’ (Google lists some likely examples ‘with established brands’), there will be further intensification of competitive pressure supporting farmgate prices. A potential game-changing development to monitor closely.

On that note, Warrnambool Cheese & Butter (WCB): Chairman’s AGM address this week (15 October) stated that the western Victorian company was planning to ‘accelerate its growth activities, invest in capital projects, increase manufacturing capacity, grow milk intake and create new opportunities.’ Undoubtedly encouraging words for many WCB suppliers; and consistent with CEO David Lord’s recent PICCC Think Tank presentation which other than calling on farmers’ efforts stated that ‘the high volume commodity play is not aligned with [WCB/Saputo’s] capabilities and won’t generate the premium returns to support improved profitability.’ Having already identified some challenges there, WCB and others face some more with the aforementioned potential new entrant in the southwest.

 

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