ANZ takes a knife to its milk price forecast

Dairy prices are under downward pressure.

Deteriorating market conditions in China have forced ANZ to revise down its farmgate milk price forecast for the 2023-24 season by 60c to $7.15 per kilogram of milk solids.

The relatively weak NZ dollar remained supportive of the farmgate milk price, but was not sufficient to offset the impact of lower dairy commodity prices, the bank said.

Dairy commodity prices have dropped sharply over the past month, and further weakness is forecast for the near term.

ANZ’s forecast is 15c above the $7.00 midpoint of Fonterra’s recently revised price guidance of $6.25-$7.75/kg.

A $7 milk price is well below the break-even point for many farmers.

Milk price futures are currently priced at $7.15/kg for the 2023-24 season, having retreated quickly over the past month.

Economic conditions in China are currently weak, and this is impacting global demand for many goods, including dairy products, ANZ agriculture economist Susan Kilsby said.

China is by far the largest global importer of dairy products.

“Indeed, they typically purchase volumes equivalent to the next eight largest dairy-importing nations combined,” Kilsby said.

China is currently experiencing a period of deflation, with data out this week showing prices fell by 0.3 per cent in July, year on year.

Consumer confidence is weak, unemployment levels are rising and the property sector is struggling.

China’s exports are also under pressure.

“All of these factors are encouraging China’s consumers to save rather than spend,” Kilsby said, adding stocks of milk powder have built up in China.

Consumption of liquid milk was curtailed during the lockdowns late last year, and the excess milk was dried, contributing to milk powder stockpiles.

“It is difficult to ascertain exact inventory levels, but it is certainly elevated,” Kilsby said.

China continues to be one of the major buyers of milk powder on the Global Dairy Trade platform, but the volumes being purchased are a little smaller than normal, and this reduced demand has been sufficient to see prices drop sharply in the past month.

“We now expect ongoing weakness in demand from China for the rest of the 2023 calendar year, leading us to revise down our milk price forecast,” Kilsby said.

ANZ’s forecast assumes dairy commodity prices will weaken further before starting to rebound in late 2023 or early 2024.

“Based on our analysis, we see Fonterra’s forecast as more circumspect than normal relative to where dairy commodity futures are currently trading.

“This prudent approach to their forecasting means dairy commodity prices can recede a little further without resulting in a revision of the milk price estimate.

“The timeliness of the updated forecast also provides farmers with an opportunity to better manage their expenditure and plan for reduced cashflows this season.”

Most dairy farmers are not as exposed to the volatile global dairy markets as New Zealand farmers are, Kilsby said.

Farm profits are nonetheless under pressure across the globe, despite farm incomes in many countries being supported by relatively stable domestic markets and subsidies, she said.

This means global milk production is unlikely to expand in the year ahead.

ASB, in a market commentary, said it does not expect to see a rapid recovery in commodity prices anytime soon.

“Unfortunately, key farm expenses like debt servicing and labour costs look set to remain sticky, putting margins under further pressure for many farmers,” the bank said.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.