The rebound in diary prices, which have surged 50% since June, will still prove insufficient to pull milk production in top exporter New Zealand from its longest slide in at least half a century.
The US Department of Agriculture bureau in Wellington, in their first estimate for New Zealand milk production next year, pegged it at 21.17m tonnes – a decline of 0.6% from the estimate for 2016.
It would also mark a third successive year of declining output for the first time on records going back to the 1960s.
The forecast comes despite a sharp revival in dairy values this year, in part in response to the decline in output in major dairy exporters such as New Zealand, and the European Union.
‘Light at the end of the tunnel’
Prices at GlobalDairyTrade, the auction run by Auckland-based dairy giant Fonterra, have rebounded in the second half of 2016 to hit two-year highs.
“The dairy industry is hoping it has now seen the bottom of this dairy price cycle during the April-to-June quarter, and the upturn in dairy markets since June is the sign of a more sustained trend to higher prices than the October 2015 price upswing,” the bureau said.
“There is light at the end of the tunnel.”
The higher commodity values have fed through into increased prices offered by processors too, with Fonterra upgrading its estimated farmgate milk price three times over the past five months, by a total of NS$1.75 per kilogramme of milk solids to NZ$6.00 per kilogramme of milk solids.
“This will have the effect of pushing most farms back to a small profit, or breakeven situation,” the bureau said.
Fonterra’s smaller rival Synlait Milk this week also lifted its forecast for its producers’ farmgate milk prices in 2016-17 to NZ$6.00 per kilogramme of milk solids.
Debt repayments first
Even so, such rises “will probably not be enough to stimulate a milk supply increase” next year, thanks to the extent of debts racked up by producers during the dairy price downturn.
New Zealand dairy farms lost an average of NZ$1.31 per kilogramme of milk solids in the year to May, the worst result in 13 years, and a factor likely to dissuade producers from ramping-up output again for now..
“Most farmers have endured one to two years of financial losses primarily funded by increased bank debt.
“As profitability returns, repaying some of this debt will take priority over investments to increase production.”
‘Face of the sector is changing’
Still, longer-term, milk output will recover, rising by 1-2% a year from 2018 to 2022, helped by productivity increases.
Even so, “it is likely to take two to three years before national milk production gets back to the levels achieved back in 2014”.
Dairy exports, meanwhile, are forecast falling 1.3% in 2017, including a 0.8% drop in whole milk powder shipments, to a four-year low of 1.31m tonnes.
In fact, for growth, dairy merchants are looking at higher-value products, switching away from commodity items.
“The face of the New Zealand dairy sector is changing, from a bulk commodities based industry to a producer of a wide range of consumer products, food service ingredients, and traditional commodities,” the bureau said.
Ultra-high temperature (UHT) treated milk and cream, and infant milk formula, which currently account for about 11% of export volumes, “could comprise close to 30% of the total in five years’ time” if current trends continue.