Whole milk powder (WMP) prices surged by around 23 per cent over January, February and then in early March.
New Zealand dairy supply ended the 2021/22 season 4 per cent down on 2020/21, with drought and falling cow numbers spurring the fall.
Dairy production in other key dairy regions around the world was also poor, albeit not as weak as in New Zealand, Penny said.
The global dairy price surge culminated in a record farmgate milk price of $9.30/kg, eclipsing the previous record of $8.40/kg set in the 2013/14 season.
As a result, many dairy farmers went on to post record high farm profits.
Penny said where China goes, global dairy prices follow.
“In the second half of the year, weak Chinese dairy demand pushed prices steadily lower even as global supply remained weak.
“Between the March peak and the end of the year, WMP prices have fallen by over a third.”
Covid clampdown
The driver of weak Chinese dairy demand has been ongoing Covid restrictions which have caused the Chinese economy to effectively stall.
In annual change terms, Chinese economic growth dipped to just 0.4 per cent in the June quarter, down from over 4 per cent in the three quarters prior.
That price weakness has come despite continued global supply weakness. To date this season, New Zealand production remains 3.5 per cent down.
Surging on-farm inflation was another key feature of the second half of 2022.
Dairy farm input inflation skyrocketed to 17.5 per cent in the September quarter versus the same quarter last year, Penny said.
As a result, dairy farm profit margins have been squeezed over the second half of the year.
However, Westpac still expects a healthy milk price of $8.75/kg for the 2022/23 season.
Dairy prices ended 2022 on a soft note. At the last Global Dairy Trade auction of the year, whole milk powder dropped 4 per cent to US$3246 a tonne.
At that level, WMP is now down by just over US$1500 or 31 per cent from its peak of US$4757/tonne in March.
Fonterra has so far kept its farmgate milk price quite high at $9 a kg of milk solids for the current season.
Westpac said that as Chinese Covid restrictions are gradually eased, global demand and prices would improve.
“Our expectation for a stronger global dairy market from around mid-2023 sets up the 2023/24 season for a bumper milk price.”
Westpac’s opening estimate for 2023/24 is $10.00/kg.
ANZ agriculture economist Susan Kilsby said an excessively wet spring now means soil moisture levels are in good shape this summer, with some regions still battling with excess moisture.
Kilsby said regulatory change is still occurring at pace, but the way forward was becoming clearer.
“Or at least, the destination is becoming apparent even though we may take various paths to get there and move at differing paces.”
Global economic conditions are deteriorating, with activity forecast to slow further in 2023.
This is resulting in higher interest rates and downward pressure on many commodity prices.
Operating costs continue to lift, squeezing operating margins for growers.
Kilsby said global demand for the majority of the food products we export from New Zealand is relatively weak at present.
Our high exposure to China for most sectors does mean demand for our exports has been directly impacted by the recent lockdowns.
“China is stepping back from its aggressive zero-Covid policy, but no significant change in demand is expected in 2023 until beyond the Chinese New Year holiday period.
“Hopefully, this will signal a turning point in consumer confidence in China resulting in additional demand,” she said.
Agribusiness banking specialist Rabobank is sticking with its $9.00/kg milk price forecast for the current year.
Rabobank senior agriculture analyst Emma Higgins said some supply growth had started to emerge in the world’s exporting regions.
“However, as demand falters, farmgate milk prices will follow global commodity market trends lower in 2023,” she said.
“Subdued supply growth has kept dairy commodity prices relatively elevated, but fragile growth is on the horizon,” Higgins said.
“And with many economies experiencing broad-based food inflation, dairy demand is likely to reduce in the short-term before any remarkable improvement.”
