Farmers are making good money from milk – but they should brace to meet commitments to trim the methane

A surge in  prices  at the latest  Fonterra global  dairy  auction once  again underlines  how  New Zealand’s dairy  industry  is the  backbone of  the  country’s export economy.  At  the level they  have  reached, dairy farmers  can  look  to  a  record  payout    this  season  from  Fonterra.

Overall,  prices rose 4.3% in  US dollars, and, better  still, 5.1% in NZ$. Star  of the  show  was  the  cheddar  cheese  price, which shot up  14%,  with other  foodservice products also  strong.

The average price for whole milk powder, which has the most impact on what farmers are paid, lifted 2.7% to US$3921 (NZ$5408) a tonne, prompting speculation it will push through US$4000/t.

A  record  payout  is  already  mooted  by  some some  economists  in  the agricultural  sector. Above  $8.80kg/MS, it might  dispel  the  gloom  being  cast across the industry  by Cop26, where the  focus has  shifted to the  need  to  cut methane  emissions.

NZ  is  reported   to be  joining more than 100 countries  in pledging to reduce methane over the next decade.

Collectively, signatories to the pledge – officially launched on Tuesday (Wednesday NZ time) – are aiming to reduce the greenhouse gas 30% by the end of the decade.

Although that might seem a major step up on the 10% reduction required under NZ law, the European joint instigators of the pledge previously clarified that not all countries would need to meet the 30% target individually.

Oil and gas methane leaks are expected to contribute much more than agriculture.

The Zero Carbon Act requires the government to reduce methane from biological sources 10% by 2030 and between 24 and 47% by 2050. To stay on track for the longer-term goal, the Climate Change Commission recommended the country up this to about 12% by 2030.

Climate  Change   Minister James  Shaw issued a  press  statement saying  NZ has joined with more than 105 countries to launch the Global Methane Pledge.  The pledge, launched overnight at COP26 in Glasgow, is an initiative to reduce global methane emissions in order to achieve the goal of limiting warming to 1.5 degrees Celsius.

Delivering on the Global Methane Pledge is estimated to reduce warming by at least 0.2 degrees Celsius by 2050.

Countries joining the pledge commit to a collective global target to reduce global methane emissions by at least 30%  from 2020 levels by 2030.

“Signing the pledge today builds on the commitment we have made to cut NZ’s net greenhouse emissions by 50% “by 2030,” Shaw said. “NZ is pleased to be part of a global initiative that will make a substantial contribution to achieving the goal of limiting global warming to 1.5 degrees.

“The target to cut methane will be achieved collectively. NZ will play its part by meeting the biogenic methane targets set out in the Zero Carbon Act  passed last year, as well as by reducing methane from fossil fuels.

“The Emissions Reduction Plan we publish next year will set out the action we will take to meet those targets, including the world leading work we are doing with the farming sector to become the first country in the world to price agriculture emissions,”  Shaw said.

Methane contributes 42% of NZ’s carbon footprint, with agriculture responsible for the vast bulk (89%).

Still,  as  farmers  head  into  the peak milk flow  of  the  dairy season, Point  of  Order  reckons  they  should have  a  quiet  celebration at  latest  GDT  result,  which  reached   an   eight-month  high. Last auction saw prices break out of recent ranges, and the current result shows prices searching for a far higher price range.

Fonterra last week increased its forecast milk payout for farmers to record levels for this season as demand for dairy holds up while supply tightens. At the latest auction, demand was solid from the dominant North Asian buyers, but analysts said the real driver came from the other regions.

“Each region, with the exception of North America, had their elbows out at this auction, buying more than previous events, and willing to push prices higher to secure product,” said NZX dairy analyst Stuart Davison.

“This is another good signal of the level of demand in the market, and the willingness of buyers to secure product.”

Dairy prices have lifted at five of the last six auctions. Davison said the latest price gains were “impressive”.

“If these sort of prices hold then it is expected to really bump up the agricultural economy”.

He pointed out farmers’ costs were increasing and a higher milk price would help them repay debt and keep their businesses resilient.

Fonterra’s forecast milk payment to farmers would see $13bn flow into regional New Zealand.

“This morning’s GDT dairy auction was another cracker, and will bolster expectations of a record Fonterra milk price this season,” ASB said in a note.

The result meant ASB’s $8.75kgMS milk price forecast for the current season was “right on track”, the bank said, noting futures traded on the NZX were at $8.67 per kgMS.

Prices gained for all products offered at the latest auction, except for butter milk powder, which slipped 3.8%.

Skim milk powder jumped 6.6% to a five-year high of US$3627/t, narrowing the price gap between it and whole milk powder.

Cheddar prices surged 14% to a five-year high of US$5058/t, butter 4.7% to US$5350/t, anhydrous milk fat 4.2% to US$6384/t and lactose  1.6% to US$1272/t.

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