“For the season to date (June-April) milk production is up 2.5% with output on track for another record season.”
Farmers are benefiting from both a strong production season and a high milk price. “These factors don’t often coincide.”
Despite these indicators being extremely positive, the mood in the NZ dairy industry remains subdued as the focus is on paring back debt and setting farms up to reduce their environmental footprint, said the analysts. “The industry is going through a period of rapid change, and the associated uncertainty is bringing its own challenges,” stressed the ANZ Research team.
So, regardless of the strong returns, they said the dairy sector is expected to shrink as higher operating costs erode production, particularly on dairy farms with high nutrient output relative to the ability of the catchment to handle the nutrient loading.
In the areas with high nutrient loading, a reduction in stocking rates or change of land use will most likely be required, said the analysts.
“Measures that will need to be taken to reduce greenhouse gas emissions (GHG) also mean we may need to reduce stock numbers further, with the rate of change dependent on what other mitigation options can be implemented now or will become available in the future.”
There are also challenges at the processing level in New Zealand, according to that publication.
“Fonterra is trying to simplify and strengthen its capital structure to better prepare it for the future, whilst Synlait has hit a rocky patch due to its high reliance on The a2 Milk Company, which is experiencing challenges selling its infant formula due to disruption to its usual channels.”
Uptick in US milk production
Globally, the report sees supply expanding at about 1.5%.
“A bounce-back from last year’s drought means the Southern Hemisphere has been responsible for most of this growth – a trend that will not persist into next season. Meanwhile, growth in the Northern Hemisphere has been pretty subdued, but output in the US has picked up in recent months.”
In March, US milk production increased by 2.1% year-on-year (y/y), while in April output shot up 3.3% y/y, noted the publication. US milk is forecast to grow by 2.1% in 2021 but if the current rate of growth persists it will exceed that level, they said.
“One factor that could slow output is that grain is expensive at present, meaning US dairy farmers who haven’t hedged their feed costs will find their profit margins under pressure.”
Milk production in Europe is expected to expand at a modest rate of about 1% in 2021. “This year, to date, milk production in both Germany and France is well behind the same period last year.”