In 10: Smooth sailing ahead?

Milk price forecasts are holding steady, but costs remain high. What does that mean for your bottom line this season? DairyNZ economist Ben Marmont unpacks the latest Econ Tracker update and what watch for in the months ahead.

 

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DairyNZ Economic Tracker tool Access here 

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Episode Transcript

SPEAKER_01 (00:01):
Ki ora and welcome to Talking Dairy in 10.
I'm your host Jack McGowan fromDairyNZ.
In this episode, we've got thelatest analysis from the DairyNZ
econ tracker update.
The good news, milk priceforecasts are holding strong,
the challenge, costs are stillhigh.
So what does that mean for yourbusiness this season?
To break it down, we've gotDairyNZ economist Ben Marmont

(00:24):
with us.
Before we begin, a quickdisclaimer.
The content in this materialincludes general commentary and
market trends and should not beconsidered investment advice.
For the full disclaimer, visitdairynz.co.nz forward slash
econtracker.
Okay, let's get into it.
Ben, the update says the sectoris in a stable position.

(00:45):
What's behind that stability?

SPEAKER_00 (00:47):
Thanks, Jack.
Great to be here.
So first off, we have farmworking expenses remaining
relatively consistent.
We're still seeing someincreases, as with all costs
that tend to always go up, butthey're increasing a lot slower
than previous seasons.
We're seeing interest paymentscoming down as the OCR continues

(01:07):
to decrease, and we're expectingmore cuts before Christmas.
Milk prices have also had no bigchange in recent months, with
the futures market remainingrelatively steady.
And when you take these threethings together in net, there's
no real big change.
They kind of balance each otherout.

SPEAKER_01 (01:24):
Cool.
Okay.
Well, that sounds reallyreassuring.
But let's talk about on-farmforecasted numbers, specifically
farm working expenses andbreak-even milk price.
What are we seeing there?

SPEAKER_00 (01:36):
Yep.
So the farm working expensesthis season, we're forecasting
at$5.91 per kilogram of milksolids.
For context, that's over half ofyour expected farm gate milk
price.
In addition to farm workingexpenses, there's a whole lot of
other expenses, such asinterest, rent, depreciation,

(01:56):
drawings, and tax.
And so once we add those on tothe farm working expenses, we
get to what we call thebreake-even milk price.
And for the 25-26 season, we'reforecasting an$8.66 per kilogram
of milk solids, which is a smallincrease on the 24-25 forecast
of$8.45 per kilogram of milksolids.

SPEAKER_01 (02:19):
Okay.
Is the breakeven milk price likean average across farms?
Like does it vary much betweenfarmers?

SPEAKER_00 (02:26):
Yes, it does.
So the breakeven milk price isvery much like an industry
average, and every farm's verydifferent, especially when we
start talking about interest andrent drawings.
You know, it's very farmspecific and it depends on the
way farmers have set up theirbusinesses.

SPEAKER_01 (02:44):
Right.
Okay.
And what's the forecast lookinglike for costs this season?

SPEAKER_00 (02:49):
So digging into those farm working expenses a
bit further, we can look atfertilizer, feed costs,
electricity, and wages.
First up with fertilizer, we'reseeing that fertilizer prices
are starting to increase againslowly after two years of
reductions.
Towards the end of July, we sawan increase in international

(03:10):
urea prices, which have largelysubsided.
Although these movements oftentake time to pass through to New
Zealand markets.
Moving along to feed, we'recoming out of a period of
reasonably low feed prices, butwe're starting to see these tick
back up.
It remains to be seen how farthese prices run up, especially
in the South Island where a lotof feed is being bought in at

(03:31):
the moment.
Everyone's a bit cognizant thatelectricity prices have been
increasing lately, and that'strue on farm as well.
From 2019 to 2022, electricitywas largely consistent on farm
at 12 cents per kilogram of milksolids.
But in the last four seasons,we've seen that increase at one

(03:52):
cent per milk solid per season.
So that's been really tickingalong.
And then finally, we're seeingthe standard tightness in the
labor market continuing to putpressure on wages.

SPEAKER_01 (04:03):
You mentioned the impact of interest rates on
breakeven milk price.
What's happening there?

SPEAKER_00 (04:08):
Yep, so we've seen interest payments on average
fall to$1.12 per kilogram ofmilk solids from a peak of about
$1.63 in 23-24.
And as that OCR, the officialcash rate, has started to
decrease, we're seeing that passthrough and people pay less and
less interest.
On top of lower interest rates,the sector has also repaid a

(04:30):
significant amount of debt inrecent years, paying back almost
half a billion dollars in thelast two years.
This lower debt level has alsoreduced interest payments.
That said, dairy debt hasstarted increasing in the last
six months, although it's stillless than the total debt held a
year ago.

SPEAKER_01 (04:50):
And finally, what domestic and global factors are
predicted that could affect milkprices in the coming months?

SPEAKER_00 (04:57):
So starting off domestically, the sectors had a
pretty strong start to theseason.
So we saw June production up 18%compared to last June, July up
2%, and August up 2.5% as well.
And this was off the back of astrong end to last season, where
May was up 8% production.

(05:17):
So strong signs, you know, as weprogress into the business half
of the season, I suppose.
Although an important caveat isthat at this time last year, we
were only 2.5% through totalproduction.
So despite a strong start, westill have a long way to go.
Moving offshore, Europe ishaving really favorable

(05:38):
conditions at the moment, andthe US has a lot of product to
move.
They're stepping up massively tothe global markets.
So the US has doubled theirbutter export since the start of
the year, and they've increasedtheir export of whole milk
powder by 40%.
When you take these together,some commentators are concerned
that supply might be beginningto outpace demand.

(06:01):
Although we haven't seen anysuggested downturns via the
Global Dairy Trade Auctions orthe New Zealand milk price
futures.
So we'll be watching with batedbreath.

SPEAKER_01 (06:12):
Before we wrap, Ben, how would you sum up the outlook
in one sentence?

SPEAKER_00 (06:17):
Well, it's still early doors.
The signs are that we're in fora pretty good season, all other
things being equal.

SPEAKER_01 (06:24):
Well, thank you very much, Ben, for sharing those
insights.
It's clear that while costs arebiting, strong milk prices and
lower interest rates are helpingkeep things steady.
If you want to check out thenumbers for yourself, head to
dairynz.co.nz forward slashecontracker and you'll find all
the latest data there.
That's it for this episode ofTalking Dairy and 10.

(06:44):
Matiwa.
Thanks for tuning in to thisepisode of Talking Dairy.
Make sure to hit follow so youcan keep up to date with our
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(07:05):
our fortnightly DairyNZ Newsemails.
As always, if you have anyfeedback on this podcast or have
some ideas for future topics orguests to have on the show,
please email us at talkingdairyat dairynz.co.nz.
Matiwa, Modi Order, catch younext time.