Milk flow Fonterra hit by drought

Dairy farmers in New Zealand can breathe a sigh of relief again, because the rain has put an end to the drought. There was sufficient rainfall in the second half of January, according to Fonterra's Global Dairy Update. This caused the grass to start to grow and the milk supply had a chance to increase. "However, it was not enough to return milk production to last year's levels," Fonterra wrote in the update.

Major inconvenience
It will be interesting to see whether it remains wet enough to maintain grass growth (during winter). This is especially true for Fonterra, because figures show that the milk supply to other processors was much less affected by the dry period.

In total, milk production in New Zealand fell by almost 2017% in January (compared to January 5). At Fonterra, however, milk supplies fell by 8% for that month. The drought had major consequences for the milk supply, especially on the North Island; the milk collection for January was 11% lower, compared to January 2017. Over the entire season, the deficit is still limited to 3%. On the South Island, milk production is lagging behind by 5%.

Greatest player
Fonterra still processes 81% to 82% of New Zealand's milk pool. This probably also explains why dairy farmers who supply Fonterra are more susceptible to drought. However, within this group there are major differences in the performance of the companies.

Milk production in January among dairy farmers who do not supply Fonterra fell by 3,7%. It should be noted that milk production in New Zealand reacts much more strongly to extreme weather conditions, compared to the United States (US) and European Union (EU). This is the result of a system based on grazing.

Bad for Fonterra?
Although Fonterra collected less milk, it is not exactly bad news for the company. Less milk also means that there will be more flexibility to process the milk into products with a higher margin. Another side effect was that the prospect of less milk could improve sentiment on the global market, causing prices on the Global Dairy Trade (GDT) to rise.

Up to and including the month of February, the GDT has recorded a plus of almost 16%. The price dropped slightly again at the beginning of March, but so far this has not translated into a higher basic price for milk. The chance that this will happen has decreased slightly due to the latest auction. However, the developments should have a favorable effect on the dividend.

Food is decisive
Due to the developments, there is a good chance that dairy farmers will not be compensated for the decline in milk production through the milk price. In the coming months (until winter) a lot will depend on the stocks that can still be built up.

However, the rising feed prices the prospects for milk supply may change. Due to the low milk prices in recent years, there are few reserves left and the combination of favorable weather and the level of the milk price has become decisive for keeping the cows or selling them.The drought is slowing down milk production in New Zealand.