NZ milk prices could head lower if production continues to increase. Photo/Supplied.
Dairy prices are again under downward pressure, thanks mostly to increased milk production in New Zealand and around the world.
Fonterra last month cut its farmgate milk price to a range of $6.25-$6.50 per kilogram of milksolids, from an earlier forecast of $6.75, but economists now say a figure closer to $6.00/kg looks more likely.
Since the last downgrade, whole milk prices - which have the greatest bearing on the farmgate milk price - have fallen by 5.6 per cent to US$2599 a tonne.
A $6.00/kg milk price would compare with DairyNZ's estimate of the price the average dairy farmer needs to break even - $5.40-$5.50/kg.
Under the regulations, Fonterra needs to advise the market by early next month if there will be any changes to its forecast.
ANZ rural economist Susan Kilsby said a stronger New Zealand dollar was putting pressure on returns at the farm.
"While higher commodity prices and a lower exchange rate are forecast to materialise before the end of the season, it is now unlikely these movements will come soon enough to support our previous milk price forecast," she said.
"We have therefore revised our milk price forecast for the 2018/19 season to $6.10/kg milksolids," Kilsby said in a commentary.
ANZ - New Zealand's biggest rural lender - had previously forecast a milk price of $6.40/kg for this season.
Kilsby said the bank's revised forecast assumed an improvement in dairy commodity prices over the second half of the season.
In order to reach the lower end of Fonterra's current $6.25-$6.50 forecast, dairy commodity prices would have to average 10 per cent higher than current prices, she said.
Farm profitability for the current season has been revised down due to the fall in the forecast milk price and lower returns for cull dairy cows.
Upward pressure on farm working expenses has also been assumed, primarily because of the tight labour market and higher compliance costs, Kilsby said.
However, market demand for dairy commodities remained robust, with the weaker prices primarily a function of growth in global milk supply rather than a demand issue, she said.
"If global milk supply growth expands more quickly in the coming months, this will delay the expected recovery in commodity prices and put further downward pressure on the milk price. The risk of extra milk production primarily lies with New Zealand," Kilsby said.
ASB Bank this week cut its 2018/19 milk price forecast by 25c to $6.00/kg.
In net income terms, the higher production is not enough to offset the lower milk price, said the bank's senior rural economist Nathan Penny. If the bank's forecast comes to pass, farmers' incomes would be about $370m lower than they would have been under ASB's earlier projections.
Westpac has a $6.25/kg farmgate forecast, but its economists say additional domestic production is putting downward pressure on that number.
Until recently, dairy exporters were facing a beneficial exchange rate, when the currency sank to around US$64.4c last month from a peak for the year of around US73.8c.
But a change in sentiment since last month has seen the currency rally back up to US$68.1c.
Favourable growing conditions over spring helped drive New Zealand milk production to a record of 271 million kg of milksolids in the peak month of October, according to data from Dairy Companies of New Zealand (DCANZ).
Year-on-year, October milk production was up 6.5 per cent on a milksolids basis while season-to-date NZ milk production rose by 6 per cent, DCANZ said.
If the current trend continues, the season could see the highest milk production ever recorded, eclipsing the record set in the 2014/15 season.
The US Department of Agriculture (USDA), in its latest overview of Oceania production, said some international buyers believed wholemilk powder supply from New Zealand would "continue to be easily available in coming months".
Wholemilk powder exports underpin the milk price paid to New Zealand farmers, so this market sentiment suggests buyers will have little appetite for higher prices and will be in no hurry to complete transactions.
The USDA reads the production situation in New Zealand as "steady to slightly lower seasonally on a weekly basis" as the season moves past its peak.
It noted that continuing drought in Australia was causing concerns for dairy producers there, with profitability suffering on many farms and herd culling being considered.
Meanwhile, the USDA said milk production in western Europe was near the low point of the season, with French production lower than this time last year.
However, milk flows were expected to increase from now into January. Internal European demand for cheese was strong, with manufacturers keen to make more but limited by milk availability.
Additional reporting by Andrea Fox