Dairy Sector: Exuberant predictions for milk payment contain risks
June 8th, 2010
Fonterra’s announcement of a forecast 2011 milk payment of $6.90 to $7.10 is encouraging news but the headline grabber was chairman Henry van der Heyden’s tip the price could reach $8kg if current global prices and foreign exchange rates hold through the year. The forecast surprised some industry observers, who ask where the gains are to come from and suggest a figure of $8 should be “treated with extreme caution” especially with the prospects of more market volatility in coming months. Still, there’s a sense in which the stars are lining up. Europe and Aust haven’t managed to ramp up production fast enough to meet rising demand and tight access to credit is constraining a revival in US milk output.
NZ is also basking in a “pinch-me-I’m dreaming” aftermath from the San Lu scandal, which has perversely bounced in favour of Fonterra and demand for imported baby formula because Chinese mums have lost confidence in local products. Merchandise trade figures for April show China recorded the biggest increase in imports of NZ goods, rising 44%, driven by demand for whole milk powder.
The flow-on effects on the economy will be slow to arrive – the 2011 payout isn’t due for some 15 months. Before then, interest may return to dairy conversions which have dropped away as investors fret about over-priced farms. Van der Heyden says in reality the co-operative is still seeing “big swings in foreign currencies and turmoil in some economies.”
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