Sunday, August 14, 2022

Fonterra chewing over milk price forecast

The GDT price index has fallen nine times in the previous 10 bimonthly auctions.

The latest Global Dairy Trade auction saw the price index fall 5%, the second consecutive fall of that magnitude and enough to suggest that Fonterra may be revising its 2023 milk price forecast, analysts say.

The index has fallen nine times in the past 10 bimonthly auctions, a total market decline of 27% over the past five months.

Whole milk powder prices fell 6.1% and are now down 25% since the start of March.

Butter prices also fell 6.1% and now off 26% in total.

Prices fell for all six products offered in the latest auction, including butter milk powder down 9.2% and skim milk powder down 5.3%.

“Global dairy demand has clearly weakened over recent weeks, although at the same time, so too has the global dairy production outlook,” Westpac senior agri economist Nathan Penny said.

“Two weaks don’t make a wrong,” was his catchy summation.

Penny expects 2022 milk production in New Zealand, Europe and the United States to fall when compared with 2021, an unusual overlap.

As China’s covid restrictions ease its economic engine should start revving and the weak New Zealand dollar is helping lift our export revenue.

“There are downside risks to our milk price forecast of $9.25 but we still expect a healthy price this season,” Penny said.

ASB analysts said global dairy demand is likely to remain relatively inelastic, and keep prices well supported.

They, too, are sticking with a milk price forecast of $10 – and that hinges on stronger prices in spring and summer.

“But an outcome within Fonterra’s wide range ($8.75 to $10.25) is still very achievable.”

The GDT auction tested the limits of demand but there was good participation from all buying regions, indicating that demand hasn’t gone away completely, NZX dairy analyst Stu Davison said.

His summary of the auction was “a continuation of the wait-and-see pattern of the past five auctions”.

“Large numbers of bidders are participating so demand isn’t completely dead, just limp,” he said.

“This result could see Fonterra updating their milk price forecast for the current season, considering the scale of the price slide over the last two auctions.”

ANZ agricultural economist Susan Kilsby said global demand for dairy remains strong but the ability to continue to pay exceptionally high prices is diminishing as economic conditions tighten.

“NZ exporters are in a relatively weak selling position at this time of the season as production starts to increase,” she said.

Across all products dairy prices fell 2.9% month-on-month in July and that trend is expected to continue in August.

ANZ said the world commodities price index fell 2.2% in July but the soft NZ dollar helped moderate the NZD price index to 0.5% downward movement.

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