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USDA GAIN: Dairy and Products

18 May 2012

USDA GAIN: New Zealand Dairy and Products Semi-annual 2012USDA GAIN: New Zealand Dairy and Products Semi-annual 2012

Increased Cow Numbers and a great 12 months of pasture growth have combined to create a “super flush” of milk which surpassed all previous peaks of daily production. Milk production in 2012 is projected to reach 19.9 MMT, 5% higher than last year’s record production level.
USDA Gain Report - Dairy and Products


Dairy, Milk, Fluid
Dairy, Butter
Dairy, Cheese
Dairy, Dry Whole Milk Powder
Dairy, Milk, Nonfat Dry


Post’s forecast of 2012 milk production is increased (4.5%) to 19.9 MMT, up just under 5% from the estimated 2011 production level.

Favorable weather conditions experienced in Q4 2011 were continued into the first half of 2012. Q1, 2012 production is provisionally estimated at 9.8% above that of the previous year owing to the cool summer temperatures, sufficient rainfall which has ensured high pasture growth rates, and better than average pasture quality. The impressive rate of growth in milk production will likely be sustained through Q2, 2012.

For the 2nd half of 2012, Post is estimating production gains of 1% over 2011 based on:

  • Normal weather patterns (some long term models are suggesting a return to El Nino conditions which often causes dry conditions on the East Coast)

  • 80,000 extra cows (+1.8%) spread over 70 to 80 new conversions and some increases to existing herds.

  • Even though cows will be in generally good condition and there will be above average levels of supplementary feed on hand especially in the North Island it is unlikely the super flush conditions of equable weather and sustained high pasture growth rates observed in October to December 2011 will be repeated over the whole of the North Island again in 2012.

With La Nina weather patterns giving all of New Zealand except Southland excellent growing conditions late in 2011 final milk production finished at 18.97 MMT up 10.4% from 2010. This is 1.5% higher than Post’s previous forecast of 18.68 MMT. The main reasons for this enormous production jump are:

  • There has been latent capacity to increase production owing to the increase in cow numbers and general farm productivity improvements over the last 4 to 5 years, which has not been realized until the 2011 year.

  • Very good weather conditions: enough rainfall and generally cooler conditions over most of the country for 10 months of the year meant pasture growth and quality has been well ahead of expected levels.

  • Cow numbers were up by 130,000 head.

  • Cows commenced milking in spring 2011(August/September) in generally better condition than previous years.

  • There was enough supplemental feed on hand or available to purchase to ensure satisfactory cow nutrition at all times.

Dairy Product Production

CY 2012

In response to the greater availability of milk, total production of PSD dairy products in 2012 is forecast at 2.37 MMT, 3% higher than Post’s previous forecast, and a 7.8% increase over the previous year.

Whole Milk Powder (WMP)

Once again production of WMP is expected to surge, and is forecast at 1.24 MMT in 2012, 12 percent higher than Post’s previous forecast, and 10% higher than the estimated 2011 production level. A major powder drying processing facility will be commissioned during the year and a smaller processor will complete its first full 12 months of operation in 2012. WMP is still seen as the growth format. Although for 6 months (March through Aug) of 2011 the sales of the SMP/fat combination valued protein higher than WMP, this advantage has been eliminated and presently the outlook for SMP is not as good with surpluses of this product available from other origins. Therefore it is assumed that production of WMP will be maximized to continue the trend established over the last 10 years. This format is the most cost effective for NZ processors to manufacture, ship, and market.

Butter, Anhydrous Milk Fat (AMF) and other Fat Products

Post forecasts 2012 butter production at 482,000MT, 1.6% lower than Post’s previous estimate, and 5% higher than the estimated 2011 production level. It is expected that most of the increased supply of milk in will go into WMP production. However, it is quicker to manufacture Anhydrous Milk Fat (AMF) and SMP, consequently during the peak milk-flows of spring (Oct to Dec), AMF and SMP will be produced in order to process the daily tidal wave of milk, even if they are not as valuable as WMP. (Note the PSD total adjusts AMF volume to a butter equivalent by multiplying the AMF tonnage by 1.22).

Non-Fat Dried Milk/Skim Milk Powder (SMP)

For SMP Post has revised the 2012 production forecast down to 380,000MT a decline of 13.6% from our earlier forecast. However this will still be 5.6% higher than the revised estimate for the 2011 level. The same factors that drive butter and fat production drive SMP production.


Total cheese production in 2012 is forecast at 265,000MT, up marginally (1.9%) from the previous forecast. While this would be a 15,000MT increase on the 2011 production level it is more a manufacturing necessity than a preference. Cheese is not a favored format at present because: the price/cost relationship heavily favors WMP; as a rule it needs to be stored onshore longer; and the market outlook is weaker than for the powders. At present the cheese plants in NZ are only put to work to deal with the seasonal peak flows in the spring early summer. However it should be noted that Whey protein products (a by-product of the cheese making process) are in demand and selling at good prices.

CY 2011

Total Production of WMP, SMP, cheese, and butter in 2011 is estimated at 2.19MMT up marginally (5,000MT) from Post’s previous estimate.

Whole Milk Powder (WMP)

Whole milk powder production in 2011 is now estimated at 1.125MMT, 12.5% higher than the previous estimate.

Butter, Anhydrous Milk Fat (AMF) and other Fat Products

As a result of lower than expected total exports and smaller than anticipated closing stocks, 2011 production is estimated at 459,000MT, 6.7% lower than Post’s earlier estimate.

Non-Fat Dried Milk/Skim Milk Powder (SMP)

SMP production varies in tandem with fat production. So for the 2011 year there is a corresponding reduction in the revised estimate for SMP, which is estimated at 360,000MT. This is a change of 80,000MT or 18%.


For 2011, cheese production is estimated at 250,000MT just under 3% less than the previous estimate. [For Overview of Dairy Processors and PSD Tables, please download the document]

CY 2012

For 2012 the main four commodity groups are forecast to see a total of 2.3 MMT exported from NZ, which is 1.3% higher than Post’s initial forecast and 6% greater than estimated exports in 2011. The projected increase in exports is attributed to increased milk flows. Ending stocks are also expected to increase, and are projected at 259,000 tons (up 13% for the 2011 level). Generally, Kiwi milk processors aim to minimize stock holdings and don’t aim to short the market by building up inventories as the sector is far too transparent now for that to have a material benefit to overall average product prices.

Ending stocks are generally rising in line with increases in production. However, product is normally held on shore for one to six months, and during the peak milk flow months (October through December) there are logistical bottlenecks which are likely to see the calendar year inventories increase at a higher rate than the average milk flow percentage increase.


WMP exports in 2012 are forecast at 1.22 MMT, 12% higher than Post’s previous forecast, but in line with recent trends. In addition it is likely that year-on-year ending stocks will increase by 17,000MT to 132,000MT.


With the anticipated increase in the production of fat and SMP it is forecast that this will translate into an increased year on year export tonnage of SMP, which is forecast at 376,000MT. This is significantly (18%) lower than Post’s previous forecast because SMP pricing has now fallen back into line with WMP and there is no incentive to produce extra AMF/SMP at the expense of WMP production.

Butter, Anhydrous Milk Fat (AMF) and other Fat Products

Total fat product exports are now forecast to reach 458,000MT (all products adjusted to butter equivalent) which is 5% less than Post’s previous forecast. AMF prices peaked in February/March 2011 and have been trending down ever since. There is no incentive now to increase fat production over and above regular customer demand except when manufacturing constraints dictate AMF/SMP production to speed raw milk through the processing system.


The gradual decline in cheese exports is expected to continue, with exports in 2012 forecast at 245,000MT, which is 7,000MT better than previous forecasts but still 8,000MT less than exports in 2011.

CY 2011

In 2011, New Zealand exported an estimated total of 2.17 MMT of dairy products from the main four commodities (WMP, SMP, Fat, and Cheese), which is about 3% higher than Post’s earlier estimate and 9.5% higher than exports in 2010. The increase in exports is broadly in line with greater milk production (up 10.4%) in 2011. Ending stocks are estimated at 229,000MT which would be 11,000MT less than the previous year but is not regarded as a significant change.


Total exports of WMP in 2011 are estimated at 1.11 MMT, 13% higher than the earlier estimate and 17% higher than 2010 exports. For the period 1992 through 2011, an exponential trend best fits the progression for the volume of WMP exports. This is exceptional but won’t be able to be continued indefinitely.


SMP exports during 2011 totaled an estimated 362,000 MT, 12 % lower than Post’s previous estimate, but 5% higher than 2010 exports. SMP prices peaked during mid 2011 which was likely too late for the processors to fully exploit and for the 2nd Half, 2011 SMP and WMP prices were more aligned which resulted in production and exports of WMP being emphasized.


Total fat product (in tons butter equivalent) exports reached an estimated 448,000 MT in 2011 which was 4.7% higher than 2010 but 5,000 MT less than previously expected. Fat and SMP prices peaked in February/March 2011 which supported export increases but probably came a bit late in the 2010/11 milk supply season to alter production significantly.


Cheese exports is 2011 totaled an estimated 253,000 MT, which was a 12,000 MT year on year reduction (-4.5%) but not as great as previously expected. However this result still falls in line with trends to minimize cheese production and exports from NZ.

[For tables, please download the document]

China has become a very important market for the New Zealand Dairy industry: it has been the leading market by value for the last three years and is also the market which takes the largest volume. New Zealand supplied 93% of the total WMP imported in to China in 2011 up from 89% in the previous two years.

Interestingly New Zealand has a FTA with China but in 2011 only 29% of the total volume of milk powders shipped by New Zealand to China was at the lower tariff rate of 6.7%. The rest of the volume was at the WTO, MFN (most favored nation) tariff level of 10%, which gives an effective average tariff rate of 9%. This would amount to approximately $35-38/MT of savings. The tariff on WMP and SMP is reduced each year, from 10% in 2008, to 6.7% in 2011, to 5.8% in 2012 through to zero in 2019. However there is a safeguard whereby once a trigger volume for imports of powders is reached the tariff for any additional imports reverts back to the WTO, MFN tariff level. For 2011, the trigger tonnage was 109,974 tons of powders, which was reached by the end of March 2011. In 2012 the trigger level will increase by 5% again to 115,474 tons which was been reached in March. Even though the official tariff will be zero by 2019 the trigger volume mechanism still be in play right through to 2023 when the trigger volume will be 197,498 MT.

It is thought that it is not the small reduction in overall tariffs that makes the FTA advantageous but the forum the FTA provides to address SPS issues and other non-tariff barriers.

When comparing exports to the US to those to China it is obvious that the average prices achieved in the two markets are very different. Primarily the product mixes are very different with the casein and MPC products being very much more costly to produce and achieving very much higher prices on world markets than WMP does.

Global Dairy Trade – Electronic Auction Platform for Dairy Products

Fonterra developed and began selling WMP via the electronic auction platform in mid 2008. Initially auctions were held monthly but by September 2010 the frequency was doubled to two auctions each month. Having started as a regional Oceania trade avenue the auction platform has become an international forum for dairy product trade. Now there are four vendors: Arla (EU); Murray Goulburn (Aus); Dairy America/California Dairies (US); and Fonterra (NZ and Aus) and purchasers from right around the globe.

Having started with WMP as the single category being sold, there are now eight commodity groups sold comprised of: WMP, SMP, AMF, Milk Protein Concentrate, Rennet Casein, Lactose, Cheddar Cheese, and Butter Milk Powder. Each auction event runs for 4 delivery periods (contracts 1 to 4) for each commodity which as the year progresses gives purchasers many opportunities to purchase product for a targeted delivery month. In addition Fonterra publishes forecasts for the volumes of each product it intends to sell. The Global Trade Dairy auction has now become a leading method of price discovery for the sector.

For Fonterra the gDT has become a significant sales channel. For example in 2011, 395,546 MT of WMP was sold via gDT which was equivalent to approximately 35% of total NZ production of WMP. In 2010 377,200 MT of WMP was sold via gDT which was nearly 40% of total NZ production.

The chart above tracks the relative pricing for the protein component in WMP (regular grade, contract period two) and SMP (medium heat, contract period two) for Fonterra product sold in the gDT auction. The fat component in AMF is used to price the fat components in the WMP and SMP sold at the same auction. The AMF is regular 210 kg drum specification sold in contract period two.

For many years now cow breeding in New Zealand has focused on increasing the protein component of the raw milk, it is easy to see why.

It would seem reasonable to assume that purchasers would tend to price SMP and WMP to equalize the protein component costings and for the most part it appears they do. However during the middle of 2011 the prices for the protein components in WMP and SMP diverged significantly. Industry commentators recognized this but were at a loss to explain the reasons. The volumes of SMP sold on gDT were relatively low during the period in question and it is likely the end-users such as Fast Moving Consumer Goods Manufacturers in Asia who were experiencing very strong demand and could afford to pay the increased prices and not change their input mixes for a short period of time.


Dairy Industry Restructuring Act (DIRA)

In 2011, the Minister of Agriculture determined that the DIRA would be reviewed and proposals for amendment to the Act be developed by the then Ministry of Agriculture and Forestry (now the Ministry for Primary Industry-MPI). This was in response to pressure from several quarters:

  • The Minister and the then MAF were thinking that the DIRA was 10 years old and the regulatory environment and sector structure had developed/changed since the inception of the Act and it was time to refresh it;

  • Fonterra itself was desirous of change;

  • Implementation of Trading Among Farmers (TAF* see below) would require regulatory change;

  • Other parties directly affected by the raw milk regulations have agitated for change;

  • Various consumer groups and NGO’s have lobbied the government to review how the milk price to consumers comes about as they think consumers in NZ are paying too much for milk.

The DIRA Amendment Bill of 2012 was placed before the Parliament in March 2012 and it has survived its first reading and vote. It is now before the Primary Sector Select Committee which will hear submissions and determine whether to recommend changes to the bill. The main proposals put up by MPI and incorporated into the bill include:

For the Fonterra Farm gate milk price:

  • embedding Fonterra's current milk price governance arrangements in legislation;

  • requiring Fonterra to publicly disclose information in relation to its milk price setting scheme; and;

  • Introducing a milk price monitoring/oversight regime. This would involve the Commerce Commission undertaking and publishing the results of an annual qualitative assessment of Fonterra's milk price setting scheme. This assessment would focus on Fonterra's underlying assumptions, inputs and processes, rather than Fonterra's milk price itself, measured against the outcomes that would have arisen in a competitive market for farmers' milk.

Fonterra share price and TAF formation:

  • a minimum fund size of $500 million as a pre-condition to launch of TAF;

  • a further pre-condition that Fonterra shares and fund securities be listed on a registered exchange at all times;

  • locking-in key structural features of TAF in legislation to ensure that they are maintained post launch, such as the presence of Registered Volume Providers;

  • prohibiting Fonterra from engaging in behavior with the purpose of hindering liquidity and fungibility (i.e. exchangeability of shares and units) of the TAF share and fund markets; and

  • Imposing obligations on Fonterra to ensure that fund investors have the ability to appoint/remove a fund manager, and the ability to wind up the fund.

And in relation to the Raw Milk regulations:

  • independent processors, who source some of their raw milk directly from farmers, only being able to access raw milk under the Raw Milk Regulations for three seasons;

  • The total quantity of raw milk available under the Raw Milk Regulations to be increased to approximately five percent of Fonterra's milk supply. The Act sets the maximum quantity at five percent but the Regulations currently limit the total volume to 600 million liters (approximately 4 percent of Fonterra's total milk supply);

  • the October Rule, governing the volumes of milk that can be taken each month, will be removed and replaced with a series of maximum quantity limits set, restricting how much milk independent processors can take under the Raw Milk Regulations in different months of the season, based on the seasonal supply curve; and

  • the price for regulated milk to be changed by removing the $0.10 margin, which is currently added to the farm gate milk price to compensate Fonterra for providing independent processors with the opportunity to take regulated milk on a flatter curve than that which Fonterra receives from its farmers.

Some participants in the sector see the main issues of contention surrounding the notional milk pricing model and the milk pricing manual as used by Fonterra; and power(s) that may be given to the Commerce Commission to review raw milk pricing methodology are perceived as too vague and provide no real protection for startup processors to get well established. This is an infant industry argument for protection which others in the sector would say is not needed given the Dairy sector in New Zealand is well established, successful, and competitive on a world stage.

The parliamentary process has been fast tracked so that the bill should be law by midyear.

Fonterra Restructuring – Trading Among Farmers (TAF)

The Trading Among Farmers (TAF) proposal was approved by farmers in June 2010, and is the final leg in a wide range of restructuring measures of the Fonterra Co-operative. Under the TAF, Fonterra would no longer be required to redeem and issue farmer supply shares on demand, instead Fonterra would set up an exchange for farmers to trade shares among themselves. The TAF has yet to be implemented as there are several issues which still need to be resolved, principally they are:

The proposal for the Fonterra Shareholders Fund would allow for investments from the general public and financial institutions, which is proving contentious for some farmers. The fund investors would be able to reap economic benefit from Fonterra Coop shares (i.e. dividend flow and capital gains/losses); however they would not have any voting rights. The establishment of a NZ$500m fund (approximately 8-10% of the total Fonterra share capital) has been proposed. Even though this equity capital fund would not have direct voting rights some industry participants think the proposal could over time have far reaching effects on complete, farmer-only control of the Co-op. The Co-op would still have to issue additional shares as production grows as generally production must be backed by share capital (at the rate of 1 share per kg of milk solids). However, they would not have to redeem shares if production fell in any one year, which would in effect give the Co-op a steadily increasing pool of permanent capital (equity) with no redemption risk for the Co-op which has been one of the goals of the restructuring process.

The Dairy Industry Restructuring Act (DIRA) has to be amended before TAF can be implemented. The formation of Fonterra was established (from the single desk Dairy Board and the farmer-owned processing co-ops (bar two)) under the DIRA in 1999/2000. This was done without Commerce Commission examination and approval. The DIRA set up various controls on Fonterra to limit the potential for anti-competitive behavior either at the farm gate or the processor level. Specifically freedom of entry and exit from the Co-op for farmers without any undue consequences was a key part of the controls on the Co-op. The Ministry for Primary Industry’s (MPI’s) view is that without some safeguards, TAF could impinge on this key part of the regulations which have governed Fonterra’s existence so far. The MPI has proposed new conditions to be observed and implemented by Fonterra in order for TAF to be implemented. The regulatory conditions for TAF include: the shareholders fund; and Commerce Commission evaluation of how the farm gate raw milk price (for Fonterra suppliers) is calculated each year.

There are some who see the political processes and additional policy and regulations taking control away from farmers of their own Co-op, and putting parts of the Co-ops internal workings into the hands of bureaucrats. However the degree to which this happens will be determined over the next few months as the bill containing the amendments passes through the parliament and becomes law.

A final vote on the TAF will be taken by the Fonterra shareholders at an extraordinary meeting on 25th June, 2012.

May 2012

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