June 25, 2021

Happy “New Milk Season”


July 1 isn’t just the start of the new financial year. It is also the start of the milk season, when the new minimum prices that milk processers will offer to farmers for the coming milk supply season, or farmgate milk prices, come into effect.

Australian producers are obliged to announce their minimum prices for the upcoming milk season on World Milk Day (1 June), following the development of the Dairy Code of Conduct. The Dairy Code of Conduct aims to increase transparency and certainty and came about following the 2018 ACCC inquiry into the dairy industry, after major milk producers retrospectively lowered prices paid to farmers during the 2016 season. The prices announced for the 2021/21 milk season were approximately 30-50 cents per kilogram milk solids (c/kgMS) higher than the previous year.

In the last week, several producers including Saputo Dairy Australia (SDA), Bulla, and Lactalis have announced further price increases. SDA opened at $6.65/kgMS on 1 June, increased this to $6.85/kgMS on June 4 and then moved higher again this week to $6.95/kgMS. Bulla will now pay between $6.85-$7.35/kgMS, after opening at $6.40-$6.90/kgMS.

In New Zealand, Fonterra has announced a record 2021-22 opening milk price of NZ$7.25-NZ$8.75/kgMS with a midpoint of NZ$8.00/kgMS, while Synlait has begun with an opening price of NZ$8.00/kgMS.

The strong dairy prices across Australia and New Zealand are a result of stable supply combined with growing demand in the post-COVID recovery. Chinese import demand has been a particularly significant factor, with high feed prices limiting domestic milk production there. Australian butter exports increased 100% year-on-year between July 2020 and March 2021, led by a 438% increase in exports to China. Export volumes of skim milk powder between July and March increased by 19% due to a 77% increase in exports to China. ABARES also notes that seasonal conditions for dairy producers are also generally favourable with good pasture growth, and low grain, hay and water prices.

Higher milk prices improve the profitability of the dairy sector, which is positive for the dairy exposure in the Partners Fund, which offers a diverse geographic spread from New Zealand through to northern Victoria. Improved dairy profitability not only reduces the impairment risk of the loans, which improves the risk-return profile of the portfolio: it also leads to high income levels which is a key factor when assessing loan serviceability. As discussed last week, loan serviceability is a key criteria assessed by the major Australian and New Zealand banks, so higher farm incomes improves the refinancing fundamentals at loan maturity.

Higher milk prices also improve optimism in the industry, and this leads to greater levels of market activity, including farm investment around scale of operations and optimisation. This should lead to an increase in the number of financing and investment opportunities.

This week Merricks Capital settled two new loans. One of these is a $28.7 million agriculture loan which will be included in the Partners Fund and Agriculture Credit Fund. This investment will fund the refinance of Harmony Agriculture & Food Company, which owns more than 14,000 premium wagyu beef cattle and two feedlots.

We also settled on a $64m loan to finance the land and construction of a 100-unit residential apartment development in regional NSW.

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