On this special Let’s Chat Markets episode, Alyssa Badger welcomes HighGround Dairy’s Stu Davison to discuss the SGX Milk Price Futures market, starting with a market update on both supply and demand factors currently impacting the Oceania dairy market, followed by a leap into the world of the NZ Farmgate Milk Price and the SGX-NZX Milk Price Futures Market. Click here to start the process today!
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Transcript:
[00:09] Alyssa: Hey, everyone, and welcome back to Let’s Chat Markets, your favorite dairy market podcast powdered by HighGround Dairy. Today, we actually have a special episode. It’s January and right when we thought there would be some rather dry conditions in New Zealand because of the El Nino weather event, the pasture outlook actually looks pretty good. As a result, we had to update our milk production forecast for New Zealand, raising it slightly, and who better to have on to discuss what’s happening in the Land of the Long White Cloud than our very own Kiwi, Stu Davison? Stu actually just got back to Chicago just as temperatures started to dip well below 0 degrees when just 24 hours earlier, he was sitting on a beach. Poor guy. I think it’s safe to say that we’ve broken him in on our Midwest winters because it can’t get much worse than what we’ve seen the last week or so. Lucky for him, though, he will be heading back to New Zealand for a couple months to visit with customers and talk with producers in the region so if you are a dairy farmer and are interested in chatting with Stu after listening to this episode, be sure to reach out and book a meeting while you can. Alright, let’s start with a quick recap of what’s happening in the Oceania dairy market. Stu, what’s going on and what do our listeners need to know?
[01:27] Stu: Well, Oceania milk production is past peak milk production months, and is settling into the summer months. In New Zealand, summer is well underway—like you mentioned, it was nice and warm—but there is a lot of feed around still, with farmers across all the key production regions still a lot of feed around on farms from both the Waikato and Canterbury. With farmers across both of those key production regions still more than happy with their feed position currently, especially considering that there were expectations that El Nino might be causing havoc on pasture production and really depressing milk production through New Zealand. We are expecting milk production through the coming months to be supported, running very closely to the year prior. Now, jumping across the Tasman quickly, Australian dairy farmers are also running well ahead of last year, with their production leaping 6.3% in November, with December likely to follow suit. Again, El Nino hasn’t impacted the lower Australian states as negatively as expected, with farmers reporting more feed on hand than otherwise.
[02:20] Alyssa: So, from the supply side, things are looking pretty good in the region. It seems like just a few weeks ago we thought sure there would be a quick summer dry out.
[02:28] Stu: Yes, exactly. We did really expect that while the forecast has been moving into El Nino for a long time and we really thought it was going to be detrimental for the whole commodity market in terms of supply side.
[02:39] Alyssa: Well, better-than-expected milk kind of sounds bearish but we continue to see positive settlements on GDT. What’s the story there?
[02:47] Stu: Yeah, it’s been quite an interesting story there. China continues to show a lack of interest they’ve presented over the last 13 months, importing much less dairy than they have in the past, which is putting downward pressure on the Oceania dairy market.
Their imports have been down significantly in 2023. However, offsetting that has been large inventories of milk powders which have blossomed through 2023 and to go along with high inventories has been reduced consumption which has really stagnated their market quite significantly. On top of all of those dairy problems, macroeconomic issues within China are also making things harder for consumers and this is bleeding back into the dairy market.
[03:25] Alyssa: OK, so if China hasn’t really been in the markets, why have we been seeing these positive results on GDT? Who is supporting purchases here?
[03:33] Stu: Yes, the big one here has been the Middle East. Over the same time period, to be honest, we saw a lot of interest come from this region in the last few months. Let’s take the most recent GDT Auction that happened this week, #348, Middle Eastern buyers actually managed to be the biggest whole milk powder buyers on the auction. That’s something that doesn’t happen very often. Usually, that’s the spot that North Asia (re: China) usually sits on so it’s quite impressive. We’ve seen a lot of the product shift from China into the Middle East basically one-for-one, and the Middle East has really soaked up that difference and supported the milk price for New Zealand farmers but also the whole milk powder market. You can also imply that if it wasn’t for the Middle East demand the last 12-18 months, the whole dairy complex in Oceania would have been a lot lower.
[04:18] Alyssa: Yeah, that’s a great point. Especially with the better-than-expected milk coming out of the region. Alright, let’s talk about the New Zealand milk price market, the most important indicator of revenue for New Zealand dairy farmers. What’s that current situation and where are prices sitting?
[04:34] Stu: Yes, a poignant mark for New Zealand dairy farmers and something that’s chatted about everywhere. Let’s start off with where the season started—the 2023-2024 season that we are halfway through. Fonterra opened their forecast for the season with a forecast of $7.25 to $8.75/kgMS, with a mid-point sitting quite nicely at $8/kgMS. That forecast has moved throughout the season thus far, moving to the low mid-point of $6.75/kgMS in August, which really skeeved quite a few people, before bouncing up to $7.50/kgMS where it sits currently with a range of only $1, between $7 and $8/kgMS.
[05:10] Now, for a bit of background, the New Zealand Farmgate Milk Price (FGMP) is informed by the big four commodities sold on the Global Dairy Trade platform, better known as GDT. The big four in this case are Whole Milk Powder, Skim Milk Powder, Butter, and Anhydrous Milkfat (better known as AMF). While Butter Milk Powder is also included in the milk price calculation, it’s not as important. The weighted average price of these commodities, across both the entire season, but also across the nearest five contract periods on each GDT, by the volumes offered by Fonterra in each contract. GDT auctions happen twice a month, and each event informs the Farmgate Milk Price so that’s 24 auctions in an entire season. These inform the process set out in the milk price manual, which is managed by Fonterra, set out under the legislation set in DIRA Law, which is the Dairy Industry Restructuring Act.
[05:58] Commodity sales prices are used to inform the value of the milk collected. Total revenue of these sales, in USD, is then informed the implied revenue of all milk collected by Fonterra. It is all then assumed to be processed into the commodities sold on the GDT platform. This creates an implied revenue. This implied revenue is then converted to NZD, using a FX rate derived from values throughout the season and then costs of processing, transportation, capital, and even lactose are all removed as a cost from the overall revenue value to provide the final Farmgate Milk Price for each season.
[06:32] So, when you put it like that, you can understand the root of milk price risk for New Zealand dairy farmers. There are many moving parts that provide risks to revenue for each farmer across the entire season. The Whole Milk Powder price definitely has the biggest implication of price movement, but all the other factors have the ability to strongly move the milk price throughout the season. The exchange rate is volatile, the cost of processing or transport can move between seasons—just think oil prices or interest rates or even inflation impacts on costs of goods have the ability to move the milk price. All of these things trickle into the Farmgate Milk Price slowly throughout the season. Every season we see the same: the opening and the closing milk price forecast in the industry and by lots of different people within the industry vary widely, with inherent the number of changes that can, and do, occur throughout each season.
[07:20] Alyssa: So, what can these producers do to manage that risk?
[07:24] Stu: Fortunately for the market, there are many options to do milk price risk management. One of the best ones we see is the milk price future offered by the SGX-NZX market. They are a great way to manage this risk. They offer a simple solution to manage all of those moving parts of the dairy commodity market for dairy farmers in New Zealand, or for that matter, any farmer that has a milk price that is similar to that of the New Zealand Farmgate Milk Price.
[07:48] So, how does the milk price future contract work? Well, it’s an annualized contract that settles to Fonterra’s final settlement Farmgate Milk Price announced in September each year and that means as a Fonterra supplier or any other New Zealand farmer that has a milk price similar to Fonterra’s price, it means that you have a physical and a financial product that settled to the same price which means for a true hedger, such as a farmer selling risk, this provides a very simple solution to manage your risk.
[08:16] There are a few things that you need to do to make sure that you have the capability to offer at this trade such as getting the paperwork done with your broker, such as HighGround Dairy. It’s really one of those things that you need to get sorted early. It takes some stress away from the market running away from you if you have the paperwork done. So best to get it done as soon as possible and then you can make the most of market opportunities as they arise. You also really need to understand how margins on futures work as this is something that can often trip people up. The other one, once you’ve gotten your education out of the way (which is something that we can help you with in the future), it’s really important to learn how to place orders with your broker. once you’ve gotten these steps in place, you can really move into other things such as options on futures which provide another level of market protection or risk management. All of these things can be learned through your broker in either one-on-one deals or via market insights from the HighGround team.
[09:08] Let’s have a look at where the market is today to put that in perspective. Currently, this season’s future (the September 2024 contract) is trading at $7.85/kgMS, which is up nine cents/kgMS over the last three days which followed the strong movement at GDT #348 this week. So, we can see how the commodity market correlates to the milk price market. Those things tend to move reasonably well in tandem.
[09:32] Looking into next season’s Milk Price Futures, the September 2025 contract is trading at $8.70/kgMS. The market is implying that it expects the milk price to improve for next season—something that I’m sure everyone likes to hear and something that I agree with too in my market outlook. The market definitely starts to look better balanced over the coming 18 months with a few more bullish tones starting to appear than this time last year. Saying that, I also want to quantify that I don’t expect record-breaking Farmgate Milk Prices for the coming season, but definitely an upside from where this season’s milk price will likely print. This contract will start to see the bulk of trading as the start of this season approaches and farmers’ and processors’ attention turns to the season ahead. This means that there will be more liquidity for those wanting to execute trades in the months ahead—a real key thing to get into the market.
[10:20] The third listed season finally traded this week also. This contract is for the 2025-2026 season—a long way away. We only saw 10 lots traded, opening trading at $8.50/kgMS. This third contract will see an increase in trading over the coming months but it’s key to remember there’s a long time to expiry so it’ll be slow and steady.
[10:42] So, that’s the simplification of milk price futures for the New Zealand market. It wraps up the entire situation of milk price risk for New Zealand farmers into one simple product that de-risks the revenue on your farm and provides an opportunity to provide some certainty to your situation and something that can provide some ease of mind. Get in touch with your broker, again, preferably HighGround Dairy. We can help you understand the market further, or if you’d like to get your paperwork underway.
[11:10] I’ve got all of the experience of being a dairy farmer as well as a lot of experience within the commodity markets and I can break these things down so that we can discuss them in terms that you guys can understand. I’m going to be in New Zealand from mid-February onwards and am more than happy to travel anywhere in the country to meet up with you and talk through the market and bring some chat about how cold it has been in Chicago. So, thank you for listening and I will hand you back to Alyssa.
[11:34] Alyssa: Awesome. Well, I can say for certain that we are all passionate here about helping farmers manage risk and I’m just so excited to expand outside of the US and onto helping New Zealand dairy farmers. Thank you for your time today, Stu and if you are attending Dairy Forum in Phoenix, be sure to be on the lookout for our team as Stu, Eric Meyer, and myself will be attending. We are very excited to see customers and colleagues in above-freezing temps, that’s for sure. And as always, thank you for tuning in to Let’s Chat Markets. Cheers.
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