NZX milk price futures break over $10/kg, may push higher

Milk price futures have gone past $10/kg for the first time. Photo / NZME

NZX milk price futures have broken over $10 a kg of milksolids for the first time since the contract started in 2016.

The September 2023 milk price futures contract last traded at $10.20/kg, having broken through $10 last week.

Wholemilk powder futures were also stronger, with market pricing suggesting a 2.5 per cent gain in physical prices at Wednesday morning's Global Dairy Trade auction.

That kind of rise would take wholemilk powder prices to within striking distance of US$5,000 a tonne - a level that has historically seen pushback from buyers and a supply surge from producers.

Stuart Davison, dairy insights manager at NZX, said the September 2023 contract hit $10.20 a kg last Thursday, where it has remained.

"It's been a massive price barrier breakthrough and it is a sign of the times," Davison said.

"To be honest the milk price is probably going to keep going a little bit higher for next season - that's my feeling," he told the Herald.

The contract for the current season is trading at a lower level of $9.77/kg - reflecting the fact that most product for the current season has been sold and shipped already.

In wholemilk powder, contracts for April, May, June and July are trading well over US$5000 a tonne.

In the physical market, wholemilk prices hit a record US$5245/tonne in 2013 before slumping dramatically.

Most commodity prices are pushing higher in line with the spike in energy prices as a result of Russia's invasion of Ukraine, but Davison said the main driver for dairy was simply a lack of supply worldwide.

"We are coming off a year of declining milk production from the major regions - the US, the EU and New Zealand, and there is no expectation that there will be a supply response in the coming season," he said.

"The market is basically saying there is a disparity between supply and demand, which will drive prices higher."

In the big picture, Davison doubted the dairy market had fully responded to higher oil and grain prices, and the impact of logistics difficulties on the market.

"So there is probably more upside to go.

"Fundamentally it is still very much supply and demand in the dairy market but it has been compounded by oil prices, inflationary pressures and logistics."

Historically US$5000 a tonne for wholemilk powder - the bigger driver of the farmgate milk price - has proven to be a tipping point for the market, in as much has it has tended to prompt a big supply response.

Consumer resistance is also expected at around that level.

Davison said some markets - such as Bangladesh and South East Asia - were inclined to step back when prices get very high, but that they had nevertheless remained active.

"That's really encouraging because it tells us that their consumers have not quite been burned yet, so they are not pulling out," Davison said.

"We have not seen that feedback loop start yet, but when it happens, it will be pretty quick."

Fonterra's latest forecast for the current season is $9.30-$9.90 per kg of milksolids - with a $9.60/kg midpoint.