Dairy prices are likely to remain stronger for longer as farmers are constrained in ramping up supply to meet robust demand, analysts say.
BNZ on Friday raised its expectation for Fonterra’s forecast milk price for next season, to $7.80 per kilogram of milk solids, from $7 per kgMS. That’s higher than BNZ’s forecast for this season of $7.70 per kgMS.
Fonterra is due to make its first milk price forecast for next season by the end of this month. Expectations from the four major banks range from $7.30 per kgMS to $8 per kgMS.
Dairy prices have lifted strongly this year, with the global dairy trade price index 44 per cent ahead of the same time last year and 29 per cent higher than its five-year average. That’s largely attributed to strong demand from China where a wealthier population and increased focus on health and wellbeing after the Covid-19 pandemic has been stoking demand for better nutrition.
“We have been of the view that product prices will ease from current levels over the coming 12 months as global supply responds to the recent run up in prices. That is what usually happens when prices lift,” BNZ senior economist Doug Steel said in a note titled Milk Price Drivers Positive. “But the chances of this response being reduced or delayed have increased.”
RNZ
The Detail analyses the recent growth in dairy farming, which China is mainly responsible for.
Steel said there’s been a very large rise in global grain prices in recent months, with United States corn prices jumping nearly 40 per cent over recent weeks to be well over twice what they were a year ago. US pasture is also in poorer condition than normal due to weather issues, and in the United Kingdom hay prices have ramped higher.
“Higher production costs for New Zealand’s northern hemisphere competitors makes an aggressive global milk supply response to current high dairy prices less likely,” he said. “Indeed, the current milk price to feed ratio in the US for example, suggests milk production growth is more likely to slow – rather than lift – into the end of this year.”
Meanwhile in New Zealand, future milk supply is likely to be constrained by environmental limitations, he said.
“This raises the chances that recent global dairy price strength sticks around for a bit longer and any price decline is slower than would be the case had competitor costs not lifted so sharply,” Steel said.
Westpac senior agricultural economist Nathan Penny also thinks dairy prices will remain strong into next season and his Fonterra milk price forecast is at the top of the range at $8 per kgMS.
Normally New Zealand production would be going “gangbusters” with such high dairy prices, but producers are struggling to find easy ways to produce more milk, Penny said.
“We could get the case that prices don’t fall any time soon,” he said.
BNZ’s new forecast still builds in some global price decline over the coming year.
“Global dairy prices could prove stronger than anticipated such that a higher milk price than forecast transpires. It’s not difficult to imagine something above the $8 mark,” Steel said.
Fonterra’s highest first forecast for a new dairy season is $7 per kgMS, and given current market conditions, the coming season could be the highest yet, he said.
Still, the outlook remains uncertain as strong global growth and recovery from the pandemic could bolster the case for higher prices while a downturn in Chinese demand, tighter monetary policy, or a Covid-19 resurgence could dent commodity prices.
Fonterra’s is likely to release a wide forecast range and it’s difficult to know where it will end up at the close of the season, Steel said.
For the current season, Fonterra has forecast a milk price of between $7.30 and $7.90 per kgMS, with a mid-point of $7.60 per kgMS. That’s up from $7.14 per kgMS last season. The major banks are forecasting between $7.60 per kgMS to $7.90 per kgMS.
“The combination of high global prices and a relatively contained New Zealand dollar is a very positive mix for milk price payments to farmers,” Steel said. “Recent dairy auction results reinforce the likelihood of a strong milk price, perhaps even a bit higher than our point estimate.”
Dairy products are the country’s largest commodity export and Fonterra estimated milk payments to its 10,000 farmer suppliers for this season would contribute about $11.5 billion to the economy.
Source: stuff.co.nz
