Dairy prices fall sharply but farmers will do nicely, thank you, from this season’s payout and Synlait has strong half-year

Only  two  months  ago  Radio NZ  was  airing  a  report “Why  are global dairy  prices  so high?”  Now, the  story  is  rather  different  after  two sharp  falls  at  Fonterra’s  fortnightly  global dairy  auctions,  and  the  pundits   are  pondering  what  has  happened.

But  NZ’s  dairy farmers  can still rest  easy  that  this  season’s  payout  will be  the  highest in Fonterra’s  history.

The  latest fall this  week was  foreshadowed  in  a  report  by ANZ  agri-economist  Susan Kilsby  on commodities. She  noted  dairy prices fell 4% month-on-month in April, driven primarily by lower prices for whole milk powder which is highly influenced by demand from China.

Kilsby  went  on to  point  out market sentiment had deteriorated as the lockdowns in Shanghai and Beijing impact consumer buying opportunities.

“The global supply of milk increases at this time of the season due to the Northern Hemisphere reaching peak milk output, but global production still remains relatively tight, which will limit how far prices fall”.

 Kilsby said it was becoming increasingly difficult to get refrigerated goods into China.

“Although the ports are operating, there is a backlog of goods to move inland, which means there are not sufficient connection points for refrigerated goods. It could take months before the ports are operating efficiently, which will impact our horticultural, meat and dairy exports”.

With  that  backdrop,  it  is  not surprising  that  prices fell again sharply  at  the  GDT event  this week.  The average price  was  down 8.5% to US$4419 a tonne, after falling 3.6% in the previous auction.

It is the fourth consecutive fall in dairy prices and the biggest drop since 2015.

The price of wholemilk powder, which strongly influences the payouts for local farmers, was down 6.5% to US$3916 a tonne.

The prices for other products also fell, including butter down 12.5% to US$5807 per tonne.

NZX Dairy Insight said the result will be a “bit of a shock” to many people.

“While a further fall was expected, the magnitude wasn’t. It seems buyers have finally had enough of paying high dairy commodity prices,” it said.

“The last time we saw a fall more than 5%  was on the 7 March 2017 auction, down 6.3%.

In  a  different  sector of  the  dairy  industry, milk processor  Synlait mirrored  the  excellent  season for  the industry by  posting a strong first-half result driven by ingredients sales volumes, commodity price increases, and a one-time gain of $11.9 million from the sale and leaseback of property in Auckland.

Key numbers for the six months ended January 2022 compared with a year ago:

  • Net profit $27.9m vs $6.4m
  • Revenue $790.6m vs $664.2m
  • Other income including one-time gain $15.4m vs $1.6m
  • Underlying profit $68.4m vs $47.7m
  • Forecast base milk price $9.60 per kilo of milk solids

Synlait chair John Penno said the strong result reinforced the hard work undertaken to get the company back on track after a challenging 18 months.

The company said its first-half revenue and sales volume was the largest on record.

“Having been part of Synlait from the outset, I saw it as extremely important to help lead the company through its recent challenges and set it up for future success. While the job is not yet done, we have made some big steps in the right direction as we reset our leadership and rebuild our profitability and balance sheet,” he said.

Chief executive Grant Watson said momentum was building at the company, which was a key supplier to infant milk formula company A2 Milk.

“Improving our systems, tools and processes will improve our ability to execute with excellence. This is a significant opportunity and will be our focus for the second half,” he said.

Synlait said it expected its full-year profit to return to “robust profitability” based on factors including; tighter management of its ingredient business and improved infant base powder volumes.

However, the company said it did not expect profitability to grow at the same rate in the second half of the financial year due to Omicron, labour shortages and ongoing disruptions to global supply chains.

Planned reductions in inventory at Synlait and Dairyworks would generate operating cashflows in excess of earnings. These strong cashflows would enable Synlait to complete its capital expenditure programme and reduce debt to comfortable levels over the next two years, the company said.

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