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Home / The Country

Westpac trims its milk price forecast

By Sally Rae
Otago Daily Times·
21 Aug, 2019 11:00 PM3 mins to read

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Westpac has shaved 20c off its 2019-20 milk price forecast, citing a more pessimistic take on the international growth outlook.

The bank was now expecting a $6.50 milk price, towards the lower end of Fonterra's own milk price forecast for this season of $6.25-$7.25.

That was despite this week's ''marginally stronger than expected'' out-turn in the GlobalDairyTrade auction, senior economist Anne Boniface said.

Overall prices were down 0.2 per cent this week. Whole milk powder prices were surprisingly strong, lifting 2.1 per cent, which was contrary to futures market expectations of a 2 per cent fall.

Recent developments in the United States-China trade war pointed to a much more enduring conflict than had previously been envisioned.

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That led the bank to downgrade its outlook for GDP growth in the US and China. GDP growth in China was now expected to fall to 5.8 per cent in 2020 and on the ground conditions could feel even weaker, she said.

Because of that, dairy prices were expected to continue to ease modestly over the remainder of the year.

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Supply-side factors continued to appear much more supportive of prices and growth in milk supply in key exporting regions was still expected to be modest.

New Zealand milk production over spring would be a crucial swing factor for whole milk powder prices, in particular.

Indications to date had been positive, as pasture conditions in many parts of the country were relatively favourable for this time of the year.

However, farmers would ''almost certainly struggle'' to repeat the exceptionally good spring conditions of last season.

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Sentiment in the sector remained weak and would not be helped by Fonterra's announcement that it would not be paying a dividend for the 2018-19 season due to its forecasts of a loss of up to $675 million for that year.

Weak sentiment, combined with increased environmental regulations limiting herd expansion, meant the bank was expecting milk production this season to be up only around 0.5 per cent on last season.

If demand for dairy in China fell sharply, even limited growth in supply would not be enough to stop prices tumbling, potentially by much more than Westpac had factored in, she said.

ASB was sticking with its 2019-20 milk price forecast of $7 but senior rural economist Nathan Penny said it was very early days.

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