Optimism about the next season's milk price has turned to pessimism as the Covid-19 pandemic continues to disrupt markets and economies around the world.
Uncertainty arising from the outbreak has seen economists pare back their milk price forecasts for 2020/21, with some raising the possibility of a sub $6.00 perkg outcome.
Rabobank is predicting just $5.60 for the upcoming season because of the likely impact on the market of the pandemic, while most others after predict a $6.30 to $6.50/kg milk price.
Economists' downward revisions come despite an upbeat Global Dairy Trade auction last Wednesday which - contrary to expectations - saw prices firm.
ASB Bank senior rural economist Nathan Penny said Covid-19 had brought back price volatility to dairy markets.
He has adjusted his season-ahead forecast down to $6.50 - with a possibility of a sub $6 - compared with a pre-Covid forecast of $7.50.
Rural lending specialist Rabobank, in a report titled "Battening down the hatches", said a number of factors linked to Covid–19, such has reduced Chinese imports, supply chain disruptions and consumption pull-back – combined with modestly rising dairy surpluses in export regions - will lead to an extended down cycle in global dairy markets.
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There are other disturbing signs that dairy, along with several other industries, is being caught up in the Covid-19 fallout.
In the United States, international news service Reuters reported that despite strong demand for basic foods like dairy products amid the pandemic, the milk supply chain had seen a host of disruptions that are preventing dairy farmers from getting their products to market, causing widespread milk dumping.
In New Zealand, Rabobank chief executive Todd Charteris said while a more testing season awaits the country's dairy farmers, the sector was well positioned to manage through the disruptions of Covid-19.
"Over the last three years, New Zealand farmers have seen demand for their products grow strongly and they've enjoyed the strong dairy commodity pricing that has resulted.
"Many in the industry have taken advantage of this favourable pricing by reducing debt levels and this will help them address the challenges arising due to Covid-19," he said in the report.
Rabobank senior dairy analyst Emma Higgins' 2020/21 forecast of $5.60/kg compares with Dairy NZ's estimate of break-even for the current 2019/20 season of $5.95 kg.
HIggins says one saving grace for dairy farmers has been a persistently weak New Zealand dollar, which as fallen from US66c in late January to just below US60c.
Due to the heightened uncertainty, New Zealand dairy processors would be conservative in their forecasts for 2020/21, she said.
Milk prices are expected to fall in the coming season, economists say. Photo / Supplied
Higgins said this would flow through to any advance rate payments impacting budgets, and that farmers should plan for this accordingly.
"The adaptability of farming budgets will be crucial over the season ahead, with the need for strong financial discipline required for New Zealand dairy farmers to be in a stable position coming out of this cycle," she said.
New Zealand dairy farmers have ridden through a similar position before, most recently with the dairy downturn of 2015 and 2016.
As Covid-19 spreads around the globe and containment efforts ramp up, economists are beginning use stronger terminology to describe the market fall-out.
The International Monetary Fund (IMF) is now anticipating the current market scenario to cause a recession as least as bad as during the Global Financial Crisis.
"Dairy will not come out of this economic cycle unscathed and over the coming 12-month period dairy commodity prices are not expected to be pretty – particularly over the second and third quarter of 2020," Rabobank's Higgins said.
But she said there were supportive factors specific to New Zealand dairy farmers which will help to support the farmgate milk price at levels higher than seen in the most recent dairy downturn or the GFC.
In recent days, Westpac has cut its forecast to $6.30/kg from $7.30, while ANZ's has gone to $6.45 from $7.10.
The Reserve Bank has, in its financial stability reports, consistently highlighted risks around high dairy farm debt.
In last November's report, the bank said: "Despite above-average dairy commodity prices and reasonable profitability for the dairy sector as a whole, a significant share of the dairy sector remains financially vulnerable."
