Dairy prices are under downward pressure on lower demand from China. Photo / NZME
The ink was barely dry on Fonterra’s latest, downwardly revised, milk price forecast for the current season before today’s Global Dairy Trade (GDT) auction showed still more weakness on world markets.
Fonterra this week has cut its 2022/23 season forecast to a range of $8.00 to $8.60 per kilo of milk solids, reducing the midpoint of the range by 20 cents $8.30/kg, and down from the record $9.30/kg paid in the 2021/22 season.
Chief executive Miles Hurrell said at the time the change reflected short-term demand for products that “inform” the milk price being softer than expected.
Westpac senior agri economist Nathan Penny has aligned the bank’s forecast with Fonterra’s new midpoint as prices limp towards the end of the season on May 31.
“However, we expect this price weakness will prove temporary,” he said.
“With this in mind, we are sticking with our healthy 2023/24 milk price forecast of $10.00/kg,” Penny said.
Current NZX futures market pricing suggests Penny is being optimistic in his season-ahead view, with the 2024 milk price futures currently trading at $7.50/kg.
NZX economist Amy Castleton said the magnitude of today’s GDT fall was bigger than expected, with prices falling for virtually all products.
The influential whole milk powder price declined 5.2 per cent to an average price of US$3,053/tonne - its lowest since November 2020.
Castleton noted that China had been much vaunted as a “saviour” for dairy commodity prices.
“That is, the idea that when Chinese demand ‘comes back’, prices will stop falling,” she said.
“Well, I think the last few GDT events are evidence enough that this isn’t the case.”
Stuart Davison, a New Zealand-based consultant for Chicago-based commodities trader HighGround said domestic milk prices in China have been lower due to oversupply there.
“China is oversupplied in its own market so they are not really looking to global whole milk powder for supply,” he said.,
“It’s not good for this season compared to where we were six months ago.”
Next season’s farmgate milk price was looking like it might have a $7 in front of it, he said.
Davison said an $8 milk price is not now considered to be high, given the sharp increases in costs the last two years and tighter profit margins.
BNZ economist Doug Steel has cut his 2023/24 milk price forecast to $7.60 from $8.30/kg.
“This is shaping up a weaker starting point for next season’s (2023/24) milk price calculations.
“Indeed, today’s auction result adds to the chance that next season’s milk price dips well below $8,” Steel said.
“We are not forecasting it but something towards $7 is possible for next season if GDT prices do not lift from current levels over the next year or so,” he said.
“There is a long way to go given that next season hasn’t even started yet, but downside risks to milk prices have increased.”
Analysts said higher production in the EU and US had also been a headwind for prices.
Meanwhile, the risk around global growth had increased even if recent banking jitters offshore looked to have calmed for the time being.
In the big picture, Steel said lower dairy prices will affect exports and the wider economy through this calendar year.
The latest dairy price declines added weight to the view the terms of trade will decline this year, he said.
Dairy exports hit a record high in 2022.
“Despite this, the annual current account deficit ballooned to 8.9 per cent of GDP driven by myriad other factors,” Steel said.
Lower dairy prices will add another headwind to New Zealand’s already-pressured external balances, he said.
“We think dairy exports are headed lower this year and this is one reason we think the external deficit is more likely to push wider before narrowing.”