On this bonus episode of HighGround Dairy's podcast, Let's Chat Markets, Alyssa Badger sits down with NZX analyst, Stu Davison to discuss this week's GDT auction event as well as other key dairy fundamentals in New Zealand including weather, prices, Chinese demand, and ongoing transportation issues. This interview can be streamed here and we have included a transcript below as well.

Alyssa:
All right, we've got a bonus episode for you this week. I have a very special guest on with me today to discuss the Global Dairy Trade auction from Tuesday and then we're going to have a chat about some key fundamentals down in New Zealand. Stu Davison is a dairy analyst from NZX, the New Zealand trading exchange, but he brings a unique flair to the team because he's also a born-and-bred Waikato dairy farmer, venturing now into life on the other side of the farm gate. As an analyst for NZX, he has the ability to use his knowledge of the New Zealand Dairy systems to provide insight to Global customers around New Zealand milk as well as dairy production. Stu, thanks for coming on!

Stu:
No problem, thanks for having me.

Alyssa:
Awesome. I think we should kick this off with a bit of a weather update if you don't mind. We're kind of curious here whether those soil moisture maps are telling us the truth or not. What's going on down there?

Stu:
Yeah well unfortunately they are telling the truth. However, there are a few facts to remember on those ones. The Waikato on the whole, the biggest regions for dairy in New Zealand, is actually doing really well--lots of grass around and conditions for growing are really good. Temperatures are cooling off, but not terrible just yet. So a lot of farmers are quite happy with where they’re at. I was actually in the Waikato earlier this week and, to be honest, a lot of grass and a lot of happy farmers so they are looking to go into winter pretty positive. That stretches into Taranaki, which is very much the same with similar conditions, maybe a little bit colder. Northland is actually looking quite good at the moment--a little more grass than they are used to at this time of year and they are pretty happy with it. The kicker for New Zealand at the moment is the South Island which is quite dry. Looking at soil moisture for the east coast is annihilated which is not ideal. Fortunately for dairy farmers on the South Island, they run on an irrigation system, especially in the Canterbury region. So, Canterbury is running quite well with good grass coverage and still milking and ticking away. However, they are struggling with water take with a possibility of restrictions on water if they keep going into next season. And these sorts of things are starting to tick away at the back of people’s minds.

Dryland farmers in Canterbury, for lack of a better word, wrecked. There’s not a lot of growth happening if you don't have an irrigator and it’s really impacting crops. So, crop guys are starting to complain and starting to talk about the word draught which is a little bit scary when it’s May, our middle-to-late autumn. So these sorts of impacts are going to flow into next season. Southland was looking very dry earlier, had a little bit of rain recently and it’s coming right but it’s the same thing we’re looking at going into the winter in the South Island with grass covers a lot lower than normal and winter crops a little behind what they should be. It will be a little bit of a feed demand for local feed but on the whole, they should survive it okay but it’s what kind of impact will come in the spring that will be the real factor.

Alyssa:
Wow, thank you for that! We got a run-through on both islands--I love it. Depending on whom you talk to, farmers seem to be quite happy but the folks I talked to in the South seem to be pretty upset that the season isn't going as well as last year, that's for sure. Speaking to autumn and into the winter, are there any sentiment changes around winter grazing? Are farmers starting to implementing changes there to get ahead of potential policy changes or is nothing really on the radar right now?

Stu:
No, there’s a lot. So it’s a big topic down in the South Island, especially Southland, where the government and local council are pushing pretty hard to change winter grazing in New Zealand to deal with the sort of damage and welfare problems. This year, they’ve given another year of leeway to change that regulation and ruling so there’s some breathing room for farmers in Southland which has been quite nice. We have seen farmers take that on board and change their systems. We’ve seen that done out between winter grazes and dairy farmer changes as well to negotiate the differences which are very important to keep the relationship going and using different land properly so that we don’t have this ongoing problem. Definitely, things changing in the Southland. Canterbury is very similar because they understand these changes are going to roll through their region as well. The mindset is changing and we won’t see the massive change in the enforcement this year but as this starts becoming more commonplace in the South Island, it will change the system extremely. So good and bad. The weather is definitely impacting prospective crops and that’s going to have an impact when we get into the middle of winter when that feed is really required. Some guys are on edge about it and some guys are okay--it depends on what system the winter crops are under at the moment.

Alyssa:
Awesome, thank you. All right, let's dig into this recent global dairy trade auction. How about that sell-off on butter? I mean it was bound to happen but, wow, we haven't seen this sort of drop in 6 years.

Stu:
No, I was going to say it really shocked us away when we looked at it. We expected a bit of a fall with it and the volume from Fonterra but 12.1% has really kind of knocked the socks off of us all. As you say, it was going to happen at some point with the bull run over the last six months and posting well above the fair value it’s not surprising that this was a step away. Not a surprise but a little bit disappointing for the local farmers to see the fat side fall away again.

Alyssa:
Yeah, Fonterra really kept adding more fat on over the last couple of months.

Stu:
So the added volume of butter we’re actually seeing through the Waikato with strong milk production on the back of strong grass growth through summer and into early autumn. A lot of Fonterra’s butter and fat plants are actually in the Waikato and Taranaki. So, we are seeing an increased volume, a 17.1% increase year over year for March 2021 versus 2020 for the North Island milk collection. That literally translates into far more butter compared to last year, especially when there’s a drought year. Fonterra was struggling to process as much product in the Waikato and Taranaki. Compared to this year, a lot more milk, a lot more butter going through butter plants. All of a sudden they have a lot of influx of butter in the market. We’re seeing it come through now, pushed onto GDT, purely because, well, we’re being told Fonterra is telling us that the market wants more butter. We’ve seen that with the Chinese, and North Asia especially, bought more butter on this GDT but all of a sudden it’s too much butter and central demand, basically, and we’re seeing things return to what they should be. So, it’s kind of a double-edged sword with a lot of supply on the ground, sent to butter factories because the butter prices were good and now it’s all fallen over again.

Alyssa:
Yeah, we’re certainly dealing with our own excess fat issues here in the U.S. Especially as we travel through spring flush here. It’s been a really strong season. Speaking to the real driver behind these incredible milk prices this year, demand from China for whole milk powder looks like they could very well out-pace the sort of volumes we saw them purchase during the last bull market. Do you have a strong opinion on that either way on whether China’s demand will maintain strength or if we will start to see them fall off a bit here?

Stu:
Yes, we are definitely seeing China’s demand being quite consistent. We’ve had one GDT where we thought they were going to falter on demand, the first one in April, however, they’ve come back and are still buying massive amounts of whole milk powder. So, it looks like they’re very consistent. We are talking to people who have a bit of a touch in the Chinese market. In the market, they still want whole milk powder but the demand for liquid milk consumption is actually driving that switch to import more whole milk powder to sort of appease their own powder needs. We are seeing that with our import and export data, too. The liquid milk out of New Zealand has gone off the charts and Fonterra themselves, earlier in the season, was struggling to drop a line, basically, of liquid milk to do maintenance basically. So that need for liquid milk in China is backing their need for whole milk powder too because Chinese producers are switching out as well. In the short term, we do see this demand for whole milk powder from China continuing. We are seeing that on the NZX derivatives market where whole milk powder futures are tracking really nicely. Their forward curves are moving up quite well and have had a lot of open interest and a lot of trading. On the whole, my opinion is that we do expect short-term whole milk powder demand to continue, however, we always, always have this concern that China will at one point slow down or stop and it usually happens very abruptly, like the last time we saw this sort of bull run on prices and demand. So, we are very cautious but also reasonably optimistic that it will last for a few more months here at the minimum.

Alyssa:
I tend to agree with you there. China's protein shortages and dealing with some other food shortages due to weather hiccups that they've seen alongside the pandemic have certainly driven this strong need for dairy products, especially with the government kind of pushing that consumption as well, telling individuals to consume dairy to be a healthier person and potentially avoid virus risk. Thank you so much for that opinion, I really appreciate it. I could talk about this stuff all day but I think I'll wrap this up with one more I thought. Where do your concerns lie for logistical constraints within New Zealand? We’re seeing headlines here in Chicago about trucking delays because of the high demand for lumber within New Zealand but also seaport congestion due to a shortage of workers. Are these expected to create any concerns for dairy in the medium term?

Stu:
Obviously, we’re talking to the guys who load stuff onto the boats and they’re saying there are constraints and they are struggling with the global shipping delay. Fonterra is being very proactive and they’re in what they call an emergency plan where they push things out and plan to have things on a boat earlier than they normally would to deal with delays. We’ve seen that already and that’s been happening for months and months so Fonterra’s all about it and making these things happen. They still have a few hiccups on the way through but they are pretty confidently getting their stuff on board. However, they are still worried about things getting off the boat on the other side properly and so they are dealing with those things. We compare that with what Synlait is doing. They have just put in a train line right next to their warehouse to stack containers straight onto trains and straight to Lyttelton Harbor. They are very aware that trucking has been under pressure and also aligns with lessening carbon production. Two things there, two very different companies but from the same track of trying to deal with these port issues and changing the transportational logistics within New Zealand to get a better outcome. Fonterra’s got a far better system to transport to most factories and they are utilizing those systems in the short-term.

Tracking in New Zealand is definitely under pressure as we’ve seen in the covid pandemic in New Zealand, which has been nothing compared to the rest of the world, but we are definitely seeing problems. Most big companies, in New Zealand anyway, are pretty confident in getting product onboard ships and to market. However, they are all very aware that the risks are still there and are very keen to keep management in place to try to mitigate them as best as they can.

Alyssa:
Awesome, thank you so much for coming on! I am so glad I got to catch up with you. I am incredibly sad I missed my annual trip to visit NZX and all of my favorite people down in New Zealand and I hope that we get to run into each other soon.

Stu:
Thank you so much for having me! We will always be here when the borders open and we are looking forward to having you down here.