Roger Dickie

International dairy prices are at a "particularly bad" part of the cycle, but are expected to improve substantially in the first half of next year, rural lending specialist Rabobank says.

New York-based Tim Hunt, who leads Rabobank's global dairy research team, said the market remained "fundamentally bearish".

Last week, prices fell by 7.9 per cent, at the latest GlobalDairyTrade auction - the third decline in row. Whole milk powder prices, the key product for determining Fonterra's farmgate milk price, fell by 11 per cent to US$2148 a tonne. Fonterra's farmgate milk sits at $4.60 a kg of milksolids - well short of the $5.30 kg required to break even. The forecast will be reviewed early next month.

Rabobank expects wholemilk power prices to recover to US$2500 a tonne by the first quarter of next year and to US$3000 by the middle of the year.

Hunt and other analysts have pointed the finger at the European Union, which has continued to raise production despite low prices, for the ongoing supply/demand imbalance that has depressed prices.


"Demand remains weakish," he said. "We are struggling to turn off the supply growth around the world and we have a significant inventory to deal with.

"The fundamental message here is that the market is still too weak to sustain ongoing recovery in prices this calendar year."

Hunt said the global supply/demand imbalance remained at the core of the problem.

"This is one of the problems and one of the particular characteristics of this downward cycle.

We believe we have seen a particularly bad cycle that is going to take at least another six months to come out of, but we don't believe we have seen a structural change in the medium term market place.
Rabobank rural specialist Tim Hunt.

"New Zealand is the only region where milk prices have fallen to extremely low levels, triggering those reductions in supply that we are looking for to rebalance this market. In Europe, the weak euro, the co-operative propping up of milk prices, and the quota systems removal, has meant that supply growth has been stronger there than it ordinarily would be."

In the US, production is still growing but only just. The milking herd declined slightly for the second straight month while prices begin to further decline. In the key state of California, production was off by 5.5 per cent compared with October last year.

Russia's ban on dairy imports from the rest of Europe had meant a lot of product was finding its way on the secondary markets of Southeast Asia, the Middle East and Africa. This, in turn, meant those regions were sitting on sizeable inventories and were less inclined to step back into the market.

But Hunt said the market's problems were cyclical and did not signify structural change.

"We believe we have seen a particularly bad cycle that is going to take at least another six months to come out of, but we don't believe we have seen a structural change in the medium term market place."

He said that as low prices found their way to the global farm gate the supply growth would be shut off. However, low prices would encourage demand and that in turn would lead to prices moving substantially up.

We still expect New Zealand to benefit from rising global trade. New Zealand may be entering a period of slower growth but the growth story is not over. This is still plenty of opportunity over the next five to 10 years.
Tim Hunt

"In the medium term, we still believe that economic growth in emerging markets will drive increased demand for dairy and will sustain a much higher trading range than we have seen."

In the US, larger scale farming has resulted in lower costs and lower feed costs have driven production higher over the past five years. He said the substantially stronger US dollar is expected to curtail US dairy exports. Dairying in New Zealand still faced a positive outlook.

"We still expect New Zealand to benefit from rising global trade. New Zealand may be entering a period of slower growth but the growth story is not over. This is still plenty of opportunity over the next five to 10 years."

 

source: NZ Herald

August 2015 Update
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** Chinas Black Monday is New Zealand's Green Tuesday
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** Why is Agriculture becoming so popular with investors
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Hello!

The news of Chinas Black Monday might have been more abrupt than most commentators had predicted - however it certainly wasn't something they didn't see coming. As the Chinese Stock exchange dropped 9% it sent reverberations around the world - nearly all markets were effected. Its seems in the most part that the markets recovered as the day went on, but it reiterated why Agricultural based investments are becoming so popular.

In the current investing climate, defined largely by economic uncertainty, low interest rates and volatile equity markets; investors are seeking out assets and sectors that display certain characteristics.

Of particular interest are assets supported by solid, long-term fundamentals. Assets that offer preservation of capital, low volatility and an opportunity to generate income, mark the highest. Throw in an investment performance that is not correlated to the performance of traditional financial markets and most boxes are easily ticked. From investing in shares to investing in farmland, agriculture investments tick many boxes for today’s investors looking to the future, and remain high on the agenda of both institutions and private individuals alike.


** Rising Demand and Diminishing Supply - the Basis for Agriculture Investments
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If the goal is to acquire assets that are non-correlated and inflation-linked, and which retain value throughout all economic cycles, then the best bet is of course well-managed,productive agricultural land.
For many investors, the ‘Real Asset’ approach is preferred as it means the investment is secured by land ownership giving not only capital appreciation, but also capital preservation and income in perpetuity for generations to come. And by investing in productive farming in another country / economy e.g. New Zealand it gives further diversification to the portfolio.

Prospective forest farmland investors should understand however, that specific expertise is required during the acquisition and due diligence process in order to identify and manage suitable assets.


** New Zealand's Green Tuesday?
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To find out how we can help you take advantage of our favourable exchange rate with land ownership in New Zealand please get in touch.

Agricultural assets have outperformed the vast majority of traditional asset classes over most timelines, delivering highly favourable risk-adjusted returns for those with well managed exposure to the asset class. Well managed agricultural land is an asset which remains productive in perpetuity.

Regards,

Will Dickie

The recent collapse in dairy prices does not equate to long-term structural market change in the sector, rural lending specialist Rabobank said.

The bank said in a commentary that while the sector was experiencing a severe cyclical downturn, a "substantial" improvement in prices was still expected by mid-2016.

Rabobank NZ chief executive Ben Russell said the long-term fundamentals for the dairy sector have not altered.

"Contrary to some recent analysis and commentary on the New Zealand dairy sector, Rabobank's view is the current price trough is part of an extended negative phase of the commodity cycle and not a structural, permanent change to supply and demand dynamics," he said.

"While the season ahead will undoubtedly be difficult for dairy farmers, the bank is firmly of the view that prices will recover to more sustainable levels over the medium term," he said.

"Current market conditions are not the 'new normal', but a highly abnormal part of a difficult cycle," he said.

New Zealand remained well-placed to continue to play an important in this improved future for the global dairy industry. "But first it must ride out the storm," the bank said in a report.

Rabobank senior dairy analyst Michael Harvey said the extent of the market collapse was - for most in the industry - "beyond expectation" and inevitably led to milk price forecasts for the 2015/16 season being slashed.

A 19 per cent fall in prices over the course of two GDT auctions in July and August took the market down from already painful levels to a low not seen since 2002.

"Given NZ production costs have increased significantly since 2002, you have to go even further back to finding pricing this far below the cost of production," Harvey said.

The report said the global dairy market had already been well on its way to a correction in 2014 - from previous record-high prices.

"Unfortunately, this downturn was then exacerbated by several other developments, including China slashing its purchases, Russia banning dairy imports from the EU, plus EU dairy quotas being removed in April this year," it said.

Rabobank said that while dairy prices were unlikely to be much improved over the next six months - as the market "strives to turn off the taps of supply growth in the face of weak demand requirements" - the factors that will trigger a turnaround were now in place.

In the medium term, Rabobank said that in wholemilk powder equivalent terms, prices would need to hit between US$3000-$4000 tonne in order to balance the global market.

On the NZX, whole milk futures prices have rallied on the prospect of less product being put up for sale by Fonterra, suggesting physical prices may start to rebound at tomorrow's GlobalDairyTrade (GDT) auction.

Fonterra has forecast a 2 per cent fall in milk production this season, but analysts said increased culling, declining use of supplementary feed, and less off-farm grazing could lead to a bigger decline, which would also be supportive for prices.

Future looks bright for those with foresight as IKEA and Apple are buying up whole forests. 
IKEA bought 83,000 acres of forest last month. In April, Apple bought 36,000 acres. What’s the
reasoning behind these retail giants buying their own forests? To manage them. 

Last year, we saw major technology and retail companies buying up wind and solar farms. Walmart,
Facebook, Apple, IKEA, Google — all decided to either build or buy renewable energy farms. Nearly
as many made pledges to start using fully renewable energy sources: IKEA said it would become
“energy independent”. Facebook is already using all-renewables-powered data centres to manage all
your likes. Now, some of them are going further down the supply chain to manage the provenance
of their materials — by buying up the forests that source their paper and wood. 

Last week, The Wall Street Journal reported that IKEA had bought up almost one hundred thousand
acres of forest in Romania and the Baltic — this, after the company had been accused of “brutal”
logging practices in Russia and cutting “old forests that have high conservation value,” according to
the WSJ. The company doesn’t log in Russia anymore, and instead will focus on farming its Romanian
forests, managing its purchase to create a renewable source for its operations. After all, IKEA uses
one per cent of the world’s wood supply, a number it’s trying to scale back by half. It’s all part of the
company’s plan to become “forest positive” in the next five years, growing more wood than it uses. 

Similarly, Apple recently bought up a 36,000 acres of forest in Maine and North Carolina. These
areas are “working forests,” or regions that act as renewable sources of wood and paper pulp for
industry. Apple and the Conservation Fund, which is collaborating on the project, says that these
“working forests” are increasingly being developed. That’s not only bad news for them commercially,
but bad news for forests that were once outside the scope of industry — as Apple’s Lisa Jackson
explained in a post about the purchase: 

We are in the midst of one of the greatest land transfers in history. In the last 15 years, we’ve
already lost 23 million acres of forestland that provided the pulp, paper, and solid wood material for
products we all use. That’s roughly an area the size of Maine. As land continues to be sold and
change hands at an alarming rate, an estimated 45 million more acres are currently in the crosshairs
of development. 

The goal of the Conservation Fund’s work is to create limits on how those working forests can be
used beyond producing paper products. These are designed to “ensure sustainable harvests and
restrict the subdivision or conversion of land to non-forest uses,” the group writes. 
 

Source:FridayOffcuts and Gizmodo  

The export market for New Zealand forestry products is stabilising.

It has been helped by the weakening kiwi dollar, reduced inventories in China and increased domestic housing demand in the US, say industry analysts.

Meanwhile, domestic demand was strong, fuelled by buoyant housing markets in Auckland, growth in the Tauranga housing market, and the continuing Canterbury rebuild, they said.

Export log prices rose in June after three months of significant falls, said Peter Weblin, Rotorua-based chief marketing manager for forestry management company PF Olsen.

Most at-wharf-gate dollar June pricing appeared to be based on A-grade at about US$100 ($147), up from a low of US$95 in May, he said. Log stocks in China continued to fall steadily through May, reducing by nearly 200,000cu m to an estimated 3.87 million cubic metres. That was down from the peak of 4.27 million cu m at the start of April.

But Mr Weblin said stocks needed to get under 3 million cu m to bring confidence back, while the main driver of log imports - the Chinese construction market - was still slow.


The dollar was definitely helping, especially for processors meeting strong demand for processed clear boards in the US and Europe.

"The depreciating kiwi really helps the finished product guys because it works on a much bigger value."

Dennis Neilson, director /founder of Rotorua-based forestry consultants DANA, said despite the doom and gloom stories about the Chinese economy beginning to melt down, New Zealand was again the biggest exporter into China, with about 1 million cu m of logs each month. "That is as much as last year," said Mr Neilson. "And while prices have declined for some grades, they've held up for others. Our exchange rate and low shipping costs means the net return to many forest owners - particularly in the Central North Island within reasonable transport distance of Port of Tauranga - remains attractive, so harvesting continues."

Mr Neilson said there were a number of factors including increased US housing starts, which were slowing US exports to China, and attracting imports from Canada.