BNZ says a milk price close to $10/kg is possible this season

BNZ is picking a $9.75/kg milk price this season. Photo / NZME

BNZ economists say a record $9.75/kg milk farmgate milk price for 2024/25 could be on the cards for Fonterra’s farmers if current trends continue.

Early this week, the co-op lifted its 2024/25 milk price forecast mid-point to $9.50 from $9.00 previously.

Chief executive Miles Hurrell said the improved outlook had largely been driven by strong demand for reference commodity products, which has helped to push prices up in recent Global Dairy Trade (GDT) auctions.

“This demand has been seen out of China, where there are indications that domestic production is below expectations, and also in Africa, the Middle East and Southeast Asia,” Hurrell said.

Recent milk price and dividend upgrades mean Fonterra will already be adding close to $2 billion to the New Zealand economy this season.

Fonterra’s forecast range width was tightened, to $9.00 to $10.00, reflecting more contracted sales as the season progresses.

“The forecast upgrade makes sense to us, following recent buoyancy in reference product prices,” BNZ said in a research note.

This morning’s “Pulse” event – a sale convened in between the main bi-monthly Global Dairy Trade auctions, saw whole milk powder prices hit US$3811/tonne ($6426) from US$3713 at the last GDT auction.

Meanwhile, the NZ dollar has dipped, and BNZ has revised down its NZ dollar forecast post the US election result, which would also be supportive of milk prices here.

“After previously discussing upside risks to $9.00, we lift our 2024/25 milk price forecast to $9.75,” BNZ said.

“This builds in firm product prices near term ahead of some easing before the season is done.”

A milk price close to $10 is possible if current product prices remain around current levels for the remainder of the season, whereas a $9 milk price would be consistent with a material pullback in product prices from current levels, the bank said.

The SGX-NZX futures market currently sits around $9.70/kg.

“It all suggests an increased likelihood that Fonterra’s milk price will hit a record this season.”

The previous high was $9.30 in 2021/2022.

“As positive as this is, it is notable that even if a record milk price is achieved this season, it is unlikely to be a record in inflation-adjusted terms,” the bank said.

On-farm costs have increased significantly over recent seasons.

Based on BNZ’s calculations, a nominal milk price of about $11.50 would be required this season for a record to be achieved in real terms.

“That looks like a stretch too far, but it is not to deny a decent milk price this season is becoming more and more likely.”

At the same time, more milk is also being made.

Importantly, in the past, a high milk price has often been associated with weak NZ milk production. Not this year.

NZ milk supply has generally had a strong start to the season, notwithstanding some very challenging conditions in the south.

NZ milk production season-to-September is up a strong 6.5%. While that above-last-year performance is likely to slow as the season progresses, full-season output is expected to be well up on a year earlier.

Fonterra this week said that it would closely monitor any factors that could have an impact on supply and demand.

“This would include any significant change to milk supply in New Zealand over the second part of the season which could lead to pressure on global milk prices.”

The co-op would continue to use its scale and flexibility when it came to optimising its product mix.

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