Medium- and long-term supply and demand signals for world dairy trading appear to hold little fears for New Zealand’s elevated farmgate milk prices, say dairy analysts.
Milk production in the seven major dairy exporting regions is steady, sometimes falling, and consumer demand for dairy is growing.
The combination should underpin milk prices and reduce the risk of sudden or sustained decreases.
Westpac senior agri economist Nathan Penny said he believes dairy farmers will get compensated for rising structural costs and higher-priced inputs because the long-term trend is towards lower milk supply.
“Demand is still steadily rising so lower milk production means higher prices and better margins, and we are seeing this around the world dairy exporting regions,” Penny said.
“I tell our farmers they are going to get paid for these higher costs being laid on them.
“Those who can incorporate changes and do it more efficiently than their neighbours will see higher margins.
“I get a lot of pushback from farmers over this message and I agree that farming has become harder and more complicated.”
Penny pointed to the strong competition for dairy land and resources from urban sprawl, horticulture, tree planting and water remediation.
“We see dairy farmers changing to cattle to avoid the compliance and regulations,” he said.
These factors tend to reduce milk supply: less nitrogen used, labour shortages, once-a-day milking.
“At the same time, we see increased demand globally for dairy products, so that means higher prices.”
Global milk production is still struggling to fire on all cylinders, Rabobank senior agricultural analyst Emma Higgins said.
Milk prices are high in the major exporting regions, but cost headwinds prevail. In Europe, supply growth during the northern hemisphere summer was stunted by adverse seasonal conditions and feed shortages, she said.
“Sluggish EU growth will keep the global supply response [to high dairy prices] in check,” Higgins said.
China’s appetite for imported dairy foods has been affected by covid lockdowns, and the risk for further disruption remains.
But Rabobank expects the Big-7 milk pool to return to growth in Q4 2022 after five consecutive year-on-year quarters of decline.
“The forecast growth rate exhibits weather risk, is against a weak comparable, and is likely to be below the long-term average through 2023,” senior analyst Michael Harvey said.
Rabobank is currently forecasting $9/kg for the New Zealand milk price in the current season.
ASB dairy analyst Nat Keall has a very strong $10/kg forecast, right at the top of Fonterra’s range of $8.50 to $10.
“There simply isn’t enough milk around to meet buyer needs and there is little sign of a swift recovery in production on the way,” Keall said.
“The litany of constraints on global production over the short to medium term is lengthy and familiar: high input costs, logistical challenges, staffing shortages, unseasonably unfavourable weather in key producing regions and difficulty navigating regulatory change.”
Keall said European production spent its peak output months deeply in the red and it now faces a painful energy crisis.
World feed prices are high because of relatively low global grain inventories. Fuel prices are also high and fertiliser prices are 35% higher than a year ago, and unlikely to fall because Russia is a key player.
“Our forecast sees NZ production 1%-3% lower in 2022-23, on top of the chunky fall we saw last season.
“Much has been made of the slowing global economy, but the growth outlook for NZ’s major trading partners over the next two years is only a bit below the historical average still and we continue to expect staples like dairy will weather the coming slowdown relatively well.”
The NZD exchange rate with the US dollar is favourable and ASB expects that Fonterra will have already hedged 70%-80% of its transactions for the season.
“A favourable rate is more or less locked in at this point.”
Keall said very tight dairy supply, relatively resilient demand and the favourable exchange rate are a recipe for a strong farmgate milk price.
ANZ agricultural economist Susan Kilsby has a more pessimistic outlook on world demand, which is being impacted by risks and uncertainties, and her milk price forecast is the lowest of the commentators’, at $8.75.
“It is not yet clear whether the drop in global milk supply will be sufficient to offset the ongoing weakness in demand for dairy products,” Kilsby said.
“At this stage, we see the supply side of the equation having the upper hand in the near term but this is likely to change as we move towards the end of the calendar year.
“The only certainty is that global risks remain high and therefore we can expect a high degree of volatility in the global dairy markets as market information and sentiments tip the scales in either direction.”