Global pandemic has hit all world markets and dairy is no exception, NZX Agri analyst Amy Castleton reports.
Dairy commodity prices have continued to drop through March in response to the ongoing impact of Covid-19. Since the last column, the novel coronavirus is now officially a pandemic, governments – including New Zealand’s – have shut borders and restricted travel, and markets have plummeted.
Dairy hasn’t been an exception, though the NZ dairy industry is perhaps better placed than many to weather the storm.
Prices fell 1.2% at the March 3 Global Dairy Trade (GDT) event, and another 3.9% at the March 17 event. Milk powders have been hit hardest, with butter and anhydrous milkfat both seeing a small recovery this month.
At the time of writing, the NZX Dairy Derivatives market sees little change ahead, with prices mostly hovering around current levels or falling a little further over the next few months.
The falls at GDT, along with the deteriorating outlook on the derivatives market, has meant milk price forecasts have been drawn back. The NZX milk price forecast for 2019-20 is now $7/kg milksolids (MS), right at the bottom of Fonterra’s range. For next season, the milk price forecast is now $6.23/kg MS, a considerable change from another near $7/kg MS forecast just a month or two ago.
Fonterra and Synlait have both put out half year results recently as well.
Fonterra reported a strong financial performance for the first half of the financial year. Normalised net profit after tax was $293 million in the six months to January 31 versus $72m the year before. Normalised earnings before interest and tax were $584m, compared to $312m.
Fonterra has maintained both its milk price and milk production forecasts. Its milk price forecast for the 2019-20 season remains a range of $7-$7.60/kg MS, while its milk production forecast is 1515 million kg MS, which would be a decline of 0.5% on last season.
Fonterra has also chosen not to pay an interim dividend given the possible impact of Covid-19 on earnings in the second half of the financial year. This is a prudent decision given the situation continues to evolve and markets are still reacting.
Synlait’s revenue is up 19% compared to the same period last financial year, but net profit after tax is down 30%. Synlait said this reflects higher depreciation and interest costs due to investment. Month-end shipment challenges also resulted in Synlait falling slightly below its guidance range.
Furthermore, Synlait has maintained its 2019-20 milk price forecast at $7.25/kg MS, with its next update to occur in late May. Total milk processed is up 8.5% season to date – however this is due to the addition of milk supply for the Pokeno plant.
Both companies have seen limited impact from Covid-19 to date, though are wary of potential falls in demand.
Market fundamentals remain supportive of commodity prices, though they have been overshadowed by the Covid-19 situation. NZ is still in drought, which ordinarily would be supportive of prices, particularly WMP.
Production from the United States and the European Union has been starting to accelerate in recent months, but the extra milk hasn’t seemed to be in excess of demand, yet.
Demand has been reasonably steady until the latest GDT event. While China was buying at that event, some other regions seemed to be sitting back to see how much further prices would fall before buying anything. The demand side of the market will continue to evolve as the Covid-19 situation keeps unfolding.