Better news coming for dairy industry? Photo / 123RF
As the sharp end of the dairy season approaches, the futures market suggests an improvement is likely at this week's global auction following a steep decline throughout much of the year.
Whole milk powder prices – which form the basis of Fonterra's farm gate milk price – have sunk by 18.6 per cent since peaking in March at US$4364 a tonne.
Much of the slide in New Zealand's single biggest export product has been put down to greater- than- expected production over the autumn months, which meant more supply came on stream than would normally have been the case.
Fonterra's forecast range for the current season's $7.25 to $8.75 per kg of milksolids, with an $8.00 mid point.
Agriculture economists' forecasts range from $8.00/kg at the top to $7.75/kg at the bottom, while latest NZX futures pricing points to a $8.02 milk price for the current season.
Most dairy farms are profitable when the milk price reaches $7.00/kg.
The market since March has been caught on the hop by higher production over autumn.
Fonterra's milk collection came to 1,539 million kg of milksolids in the season just past – the highest since 2016, when the number came 1,566 million kg.
Futures market pricing suggests a 3 per cent lift in the whole milk powder price at the Wednesday's Global Dairy Trade auction, but Westpac senior agri economist Nathan Penny expects a more modest 1 per cent improvement.
He said much will depend on how the key production months of September, October and November unfold, and to a lesser extent the following months of December January and February.
"We still really don't know how spring production is going – it's too early.
"That's the key – how good or bad the spring is."
Winter had been patchy – favourable in the Waikato but not so in Canterbury.
Penny said weakness in prices since March was a reflection of how much milk was produced in the normally slow autumn months.
"It was a stonking increase over the March, April and May months – 10 per cent higher than the same months in the prior season - especially considering the number of constraints that are on dairy farms now," he said.
"Buyers should be working through that extra milk now and what happens next will be dictated largely by what happens to new Zealand's spring production.
"The tap gets turned on in September – so we will soon get a good feel as to how the market is going to go from then," Penny said.
Recent weakness in dairy has shown in the ANZ's commodities data.
The bank's World Commodity Price Index ll by 1.6 per cent in August following a similar decrease in July, led by weakness in dairy and forestry.
ANZ's agri economist Susan Kilsby said dairy prices are now expected to stabilise near current levels as the global milk supply is growing only marginally.
"Global consumer demand appears stable but some countries have imported more product than usual this year," Kilsby said.
"This indicates stock levels may be relatively high, curbing future demand," she said in a commentary released with the index.
While the ANZ's data shows the dairy prices eased a further 4 per cent month on month in August after peaking at extremely high levels in May, the meat index climbed 2.8 per cent with prices now back to pre-pandemic levels. Both beef and lamb returns have firmed in the past month and stronger prices have also been recorded for wool.
Coarse wool prices are now at their highest level in over two years, with prices expected to firm further due to stronger interest from overseas buyers.
The horticulture index lifted 1.3 per cent in August and aluminium prices lifted again with August, now at their highest price in a decade.
The forestry index fell relatively sharply in August with prices back 6.6 per cent from the previous month, but export prices are coming off exceptionally high levels., the bank says.