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Dairy Australia - Market News

10 March 2014

Dairy Australia - Fortnightly Update 7 March 2014Dairy Australia - Fortnightly Update 7 March 2014

Further decreases in milk powder prices drove a 4% fall in the GDT Price Index and Fonterra announced an increase in its forecast 2013/14 farmgate milk price to NZ$8.65/kg MS.
Dairy Australia - Market News

Global Developments

Further decreases in milk powder prices drove a 4% fall in the GDT Price Index at this week’s GlobalDairyTrade (GDT) auction (event 111). Increased volumes certainly played a part – total product offered at this event was 87% above the same time last year, and 66% above event 63 in March 2012. WMP was one of the biggest losers (down 5.7% to average US$4,703/t) as the New Zealand season goes from strength to strength. Buyers are still looking to cover the NZ low season however, with August and September deliveries still fetching over US$5,000/t. SMP pricing eased 3.9% to US$4,658/t, with a continuing premium for Oceania product compared to Northern Hemisphere alternatives. AMF lost another 3.5% to sell at US$5,126 on average, while butter prices rallied – reversing last event’s losses and increasing 3.8% on average to US$4,746/t. Cheddar also steadied, with the average price increasing 0.7% to US$4,837/t. See for full details.

Fonterra last week announced an increase in its forecast 2013/14 farmgate milk price to NZ$8.65/kg MS (around $8.01/kg MS in Australian terms). Fonterra attributes the increase to continuing strong global demand for milk powders, but acknowledges a continuation of the 70c/kg MS gap between the forecast price and that derived under the co-operative’s milk price manual. In a move to further capitalise on commodity market strength, Fonterra has also opened a dairy ingredients warehouse in Dubai, with a capacity of more than 5,000 metric tonnes. The facility will service customers throughout the Middle East, Africa, and the Commonwealth of Independent States (CIS).

The Australian Front

Murray Goulburn (MG) has ramped up its communication with suppliers on the co-operative’s plan to establish an Australian Securities Exchange (ASX) listed unit trust. MG’s 3 March update states that the funding is necessary—and preferable to additional bank-financed debt in the face of insufficient retained earnings—for $400-500m of capital investment ‘to improve MG’s capability and capacity’ required to meet demand in infant nutrition, cheese and liquid milk. Following on from meetings with ‘more than 1,200 MG suppliers/shareholders,’ the 7-page update states that the envisioned capital structure would see MG retain ‘100% farmer control’ via a unit trust that, like Fonterra’s fund vehicle, provides ‘economic rights’ but not voting rights to unit holders. The latter would receive a distribution from the trust equal in value to a dividend on the shares held by MG’s suppliers who are expected to see their ordinary shares trade at the same value as the listed units’ and have Australian banks recognise the ordinary share value. Under the envisaged plan, MG’s farmer suppliers would have to meet a ‘share standard’ requirement (already met by approximately half the suppliers), which would ‘bring forward’ existing shareholding requirements for some suppliers. MG management and suppliers have much to discuss as capital structure consultations progress.

Bega Cheese Limited (BGA) has announced to the ASX that the company’s subsidiary Tatura Milk Industries (TMI) has received a position paper from the Australian Taxation Office (ATO) stating that TMI was not a co-operative for tax purposes over tax years 2009-2011—and so owes another $13.3 m in tax. BGA’s announcement states that TMI believes it qualified as a co-operative and so the deductions were consequently allowable. BGA expects to consider further action should TMI’s response to the tax auditbased decision fail to change the ATO’s position.

The Australian federal government’s primary agricultural research body, ABARES, is forecasting world dairy prices to hit higher average levels in 2014-15, due to, yes, robust demand prevailing throughout Asia, and China in particular, as urbanisation, income growth and westernisation of diets continue. See Agricultural commodities: March quarter 2014 for details.

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