Rabobank has increased its farmgate milk price forecast by 40 cents to $6.35 kg/MS for the 2020/21 season.
In its latest Dairy Quarterly Report – A Delicate Rebalancing, Rabobank said food service revenues had strengthened in the last quarter, and the bank was now expecting higher global dairy commodity prices for the remainder of the 20/21 season.
Despite this, RaboResearch senior dairy analyst Emma Higgins said the market recovery remained fragile.
"Food service revenues are improving, but they remain well back on pre-Covid levels."
It would take time for the sector to make a full recovery, "even for those countries that have been well ahead of the curve," Higgins said.
"Overall, robust retail dairy sales growth had not been sufficient to offset the losses of dairy sales to food service, and year-on-year dairy demand growth was unlikely to be in sight for the key dairy export regions until quarter one 2021"
The potential removal of government support programmes – such as government dairy purchases, inventory management and fiscal stimulus for consumers – was another reason Rabobank was taking a cautious view toward the global dairy market recovery, Higgins said.
"These programmes were a key contributor to the rally in dairy commodity prices during quarter two, however, the outlook for these is much less certain as we move into the final quarter of the year."
Listen to Jamie Mackay interview Emma Higgins on The Country below:
Uncertainly over Chinese demand and an anticipated lift in global dairy production were further reasons for caution, Higgins said.
"Chinese dairy import behaviour over the next six to nine months presents uncertainties. So far Chinese dairy consumption has recovered better than expected, but its strengthening domestic production and possible shift in stocking strategy raise questions over its import requirement into 2021."
Higgins said the bank also expected to see global dairy supply across the "big seven dairy exporters" – US, Uruguay, Brazil, Argentina, EU, Australia and New Zealand – to increase by 1.3 per cent in quarter four of 2020, and by 1.0 per cent in the first half of 2021.
"This will contribute towards weak market fundamentals into quarter two next year when we expect to see exportable surpluses start to decline."
As a result of these factors, Higgins said Rabobank's forecast remained towards the lower end of Fonterra's forecast range.
The report says New Zealand export volumes in the three months to July 2020, fell by two per cent on the prior year.
"Increased shipments to Algeria, Saudi Arabia and Thailand were not enough to offset lower volumes to the US, China and Japan," Higgins said.
Export volumes for the remainder of the year would depend largely on the strength of Chinese purchasing in the lead-up to the beginning of the new calendar year, while balancing higher than average inventories, Higgins said.
Conditions on-farm across most of the key dairying regions were looking good for the new season's spring flush, Higgins said.
"Jack Frost has been kind this winter with mild weather across most of the country in recent months," she said.
"Pasture covers have recovered areas impacted by the summer heat, and some parts of the North Island are experiencing early silage making."
Rabobank's base case scenario is that New Zealand milk production would range between flat growth, to a modest lift of two per cent, compared to last season.
"This is based on our assumption that, in contrast to last spring, any fickle weather will not leave a tangible mark on production in key dairy regions," she said.
What to watch in Q4 and Q1
The report said the key factors for the global dairy sector over the next six months were: shifts in global trade, economic recession around the globe and how the industry embraces e-commerce.
"Currency movements have the potential to significantly influence global dairy trade over the remainder over the year and into next," Higgins said.
"The US dollar has retreated by nine per cent versus the Euro since June, placing the US in a more favourable trade situation compared to European exporters, while in Argentina, the efforts of the government to inflate the value of the peso are likely to have a negative impact on the country's competitiveness in global dairy markets."
Higgins said another factor influencing the sector outlook was the extent to which global economic recession influenced global dairy demand.
"High unemployment rates and slower economic growth are expected to put a damper on dairy demand lasting into the first half of 2021."
"While some consumers may find comfort, trust, and indulgence in their favourite brands, other consumers will trade down, boosting private label sales," she said.
According to the report, the industry's ability to adapt to changing consumer purchasing behaviours was a further factor that would dictate its fortunes in the months ahead.
"Covid-19 has rejuvenated the dairy category as consumers returned to a trusted, nutritious product with health and wellness in mind. It has also accelerated some trends, such as e-commerce, which provides opportunities as well as challenges for the dairy sector," Higgins said.
Other key watch factors cited in the report included the upcoming US election in early November, and the potential for a resurgence in Covid-19 cases.