Westpac says dairy prices are "on a tear". Photo / NZME
Global dairy prices are "on a tear" to the extent that Westpac is upgrading its milk price forecast for next season by a dollar to $8.50 per kg of milksolids and putting some upside pressure on its $9.50/kg forecast for the current season.
Prices at this morning's Global Dairy Trade (GD) auction were again sharply higher and were surging well beyond what Westpac had previously expected, the bank's senior agri economist Nathan Penny said.
"With this ongoing price strength, we have lifted our 2022/23 farmgate milk price forecast by $1.00 to $8.50/kg," he said in a commentary.
"At the same time, there are upside risks growing to our already record-high forecast for the 2021/22 season of $9.50/kg," he said.
Penny said a weaker New Zealand dollar would support a higher forecast for next season.
Fonterra last month upgraded its forecast farmgate milk price range to $8.90-$9.50 per kgMS, with a $9.20 mid-point, for the current season, which ends in May.
Mike Cronin, managing director of corporate affairs at Fonterra, said the co-op may soon have to go back to the drawing board.
"We are certainly running the numbers after a pretty good night's work," Cronin said on NZME's The Country radio show.
Cronin said, however, that there were uncertainties in terms of how the situation plays out with Covid-19 and with rising tensions between Russia and Ukraine.
He said demand remained strong at the morning's auction, particularly from North Africa and the Middle Eastern buyers.
"It's really steady and demand doesn't seem to be falling off," Cronin said.
Prices have in the past spiked but what's different this time is the supply situation.
"The Northern Hemisphere is off on their supply - the EU and the US. That's not going to change in the next 12 months I wouldn't have thought, so it's a different picture," Cronin said.
Prices on the GDT platform have lifted nearly 14 per cent so far over 2022, while whole milk powder (WMP) prices have gained over 16 per cent.
Westpac's Penny said that on the global dairy supply side, everything that could go wrong has gone wrong.
Over the year to date, bad New Zealand weather had "slammed the brakes" on New Zealand dairy production.
Westpac expects local production to fall by 3 per cent compared to last season, compared with its previous forecast of a 1.5 per cent decline.
A similar combination of bad weather and high feed and other costs has hit production in other key exporters such as the EU and US.
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"We can now add Ukraine-Russia tensions to the supply mix. Both countries are major grain producers, while Russia is a major oil and gas producer.
"As a result, the tensions are putting further upward pressure on already sky-high global grain and fertiliser prices," he said.
In turn, this is adding even more upward pressure on global dairy prices, Penny said.
At this morning's auction, the GDT price index jumped by 4.2 per cent.
Whole milk powder prices - which have the biggest influence on Fonterra's farmgate milk price - lifted by 4.2 per cent to break the US$4500/tonne mark, with an average US$4503/tonne, building on a 5.8 per cent increase at the previous auction.
Skim milk powder - Fonterra's second-biggest reference product - recorded the biggest increase of the event, with a 6.0 per cent leap to an average US$4295/tonne.
Butter wasn't far behind - increasing 5.1 per cent to an average US$6686/tonne.
Cheddar rose 3.5 per cent to an average US$5881/tonne, while lactose lifted 3.4 per cent to an average US$1609/tonne, but with very little product traded; and anhydrous milk fat added another 1.2 per cent to its balance with an average US$6889/tonne.
Butter milk powder and sweet whey powder were not offered at the auction.