NZ milk prices heading towards a record high, say economists

NZ milk prices will break records if the current price trend continues, economists say. Photo / File

New Zealand farmgate milk prices are heading toward a record high, if latest Global Dairy Trade auctions are anything to go by.

At this morning's auction, prices overall were up by 2.2 per cent.

Whole milk powder prices, which have the greatest bearing on Fonterra's farmgate milk price, gained 1.5 per cent to US$3803 a tonne, continuing a generally firmer trend that started in August.

ASB Bank, which lifted its 2021/22 season forecast by 55c to $8.75 per kg, said the chances of a record milk price were "very much alive".

The previous record was $8.40/kg set in the 2013/14 season.

"GDT events over the first half of spring have shown no sign of demand softening and, with supply continuing to look tight, we're comfortable making a sizeable upward revision," ASB said in a commentary.

"Fonterra should also be around 80 per cent-plus hedged by this point in the season, and we expect the co-op could wind up with an effective exchange rate just north of the US69c mark – a favourable exchange rate considering where NZ commodity prices are," ASB said.

The bank sounded a note of caution, noting commodity markets have been particularly volatile over 2021.

"Still, the trends over the beginning of spring suggest that the possibility a record farmgate milk price for the season is very much alive."

Westpac senior agri economist Nathan Penny said ongoing weakness in global dairy production would continue to underpin global dairy prices.

New Zealand dairy production over August was down 4.2 per cent compared with August 2020.

"In addition, anecdotes suggest that this production weakness has continued through September and into October," Penny said.

"All up, the solid result and outlook reinforces our 2021/22 farmgate milk price forecast of $8.50/kg."

Fonterra's current forecast for 2021/22 has been pitched in a $7.25 to $8.75/kg range.