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U.S. and New Zealand Prices Tumbling

20:09PM Dec 11, 2014

U.S. barrel cheese prices break streak of above­-$1.50 prices as Fonterra projects much lower prices for New Zealand.

Despite falling milk and dairy product prices, U.S. dairy producers still have it good compared to their counterparts in New Zealand. Fonterra’s latest projected payout price, released December 10, is expected to drop to seven-year lows.  

“Fonterra’s much-anticipated pay-price revision delivered a blow to New Zealand dairy farmers and New Zealand’s economy,” says Sara Dorland, analyst with the Daily Dairy Report and managing partner of Ceres Dairy Risk Management, LLC, Seattle. The New Zealand-based dairy co-operative dropped its 2014-15 seasonal forecast by 11.3%, from $5.30/kg of milk solids to $4.70/kg.

“The projected payout of $4.70 is in stark contrast to last season’s $8.40 and represents a 44 percent pay-price deterioration from season to season,” says Dorland. “This latest estimate is the lowest pay price since 2007’s $3.87, and the first time since 2009 that the payout has been below $5/kg.”

To put the price in perspective, Dorland notes that Fonterra’s projected pay price—at 8.51 percent milk solids and using a 77-cent exchange rate—equates to a U.S. Class III price of $10.83/cwt., a price U.S. dairy producers have not seen in decades.

However, New Zealand’s cost of milk production is substantially lower than the U.S. cost of production. According to Dairy NZ’s Economic Survey 2012-13, owner-operator farm-operating expenses in New Zealand were $5.03, or 33 cents above Fonterra’s latest payout projection. Farm working expenses accounted for $4.13 of the total, which is still 57 cents below the latest projection.

“Between now and the end of the season, New Zealand dairy farms will look to cut back expenses where possible,” says Dorland. “Total feed and fertilizer costs are two of the biggest spends, at 21 percent and 14 percent, respectively, of working expenses. Farms looking to conserve cash could dry off their cows early to avoid unjustified spending given the expected payout.”

Fonterra blamed its reduced forecast on “falling oil prices, geopolitical uncertainty in Russia and Ukraine, and subdued demand from China.” The sheer size of the island nation’s dairy industry significantly influences the country’s overall economy, and reduced dairy farm incomes are anticipated to cut the country’s gross domestic product (GDP) by as much as 2.7%. However, reports from New Zealand indicate that producers are confident that they can weather a single season of low prices.

“Fonterra’s latest forecast could be heralding things to come for other dairying regions,” says Dorland.

U.S. prices also heading south

This week, CME Group barrel cheese prices snapped their 639-day streak of above-$1.50 prices to set a 2.5-year low. “May 25, 2012, was the last time CME barrels traded below $1.50, closing that day at $1.47,” says Dorland. “The current downward trend in CME cheese prices is partly seasonal, but markets are now in surplus given falling exports and rising dairy product production.”

CME dairy futures are also predicting lower prices. The forward curve for cash-settled cheese futures for 2015 averaged $1.70/lb. at closing on December 9, and the current cash-settled cheese futures average for 2015 was lower than the average announced in 2012 and 2013 of $1.7076 and $1.7683, respectively. It was also much lower than this year’s January through November average near $2.19, she notes.

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