Rabobank has taken a less pessimistic view of the dairy market in the season ahead while Dairy NZ has advised farmers to be cautious with their planning. Photo / Supplied
Rabobank has taken a less pessimistic view of the dairy market in the season ahead while Dairy NZ has advised farmers to be cautious with their planning. Photo / Supplied
Rural lending specialist Rabobank has taken a less pessimistic view of the dairy sector and has upgraded its farmgate milk price forecast for 2020/21 on the back of easing Covid-19 restrictions in many parts of the world.
The bank, which was at the bottom end of market expectations, now expectsa $5.95/kg milk price for 2020/21, up 35c from its previous forecast.
However, at that level its forecast is only slightly ahead of Dairy NZ's estimate of breakeven for 2020/21 of $5.80-$5.90/kg.
NZX milk price futures point to a $6.25/kg milk price, and the whole milk powder futures market suggests another gain at tonight's twice-monthly Global Dairy Trade auction.
Rabobank said government intervention buying and the reopening of the food service sector have helped to jump-start dairy demand in key international markets, and that the global dairy outlook is now not nearly as dire as it was at the height of the Covid-19 crisis.
The bank says dairy markets have performed better than expected over recent months and prices should now avoid dropping to the levels anticipated earlier in the year.
"The northern hemisphere experienced a rebound in milk and dairy product prices toward the end of quarter two as a result of government intervention, while we've also seen a rebound in cheese prices – particularly in the US – with this largely attributable to the re-opening of the food service sector," Rabobank senior analyst Michael Harvey said in a report.
"And these factors have helped boost dairy demand and prices have moved back toward, or in some cases above, pre-Covid levels."
Westpac senior agri economist Nathan Penny expects whole milk powder prices will rise by about 2 per cent at tonight's auction as global dairy markets continue to stabilise.
Whole milk powder prices - the biggest driver of the farmgate milk price - rose 2.1 per cent at the previous auction on June 3, after falling nearly 15 per cent since January.
"We are slightly more bullish than the futures market given the market's established pattern of undershooting auction results," Penny said.
"Over the next few months, we anticipate that dairy prices will continue to rebound modestly from the earlier Covid-related falls."
However, Penny expects global dairy prices will come under renewed downward pressure as the global recession starts to bite.
Westpac expects $6.30/kg milk price this season, but Penny said there was a slight upward risk to that forecast.
"It's good that things have started to stabilise, so that's a positive for now," Penny said.
Fonterra has pitched its milk price in a wide range for 2020/21. Photo / NZ Herald
Fonterra's latest forecast is in a wide $5.40 to $6.90 range, down from last season's range of $7.10 to $7.30.
OM Financial's director of institutional commodities, Nigel Brunel, said dairy markets seemed to have quietened down after a volatile start to the year.
"Whole milk and skim milk powder have settled, so the market has found its level."
Whole milk powder futures prices have been trading at a slight premium across the board compared with the last auction's prices, suggesting a gain was in store at tonight's auction, Brunel said.
Rabobank's Harvey said that while price rebounds were a sign the global dairy sector was on a path to recovery, the true strength of the current market was difficult to assess and the sector was not yet "out of the woods".
Dairy NZ said that for most farmers, a breakeven under $5.75/kg was achievable but that it would require attention to detail to reduce spend in the big-ticket items of feed, wages and repairs and maintenance, along with restrictions on capital expenditure and personal drawings.
"Covid-19's impact highlights that farmers need to be internationally competitive and resilient in their businesses," Dairy NZ said in a statement.
"This also reinforces the need for banks and the Government to take a long-term view that sustains farm businesses as we deal with Covid-19 in the short-term and make the transition to a prosperous and lower footprint future."
Dairy NZ said there are many things that could influence the milk price over the next six to 12 months, and emphasised the importance of farmers reviewing their costs.
