Dairy market analysts differ widely in their preliminary forecasts for the farmgate milk price next season, which begins in two months.
The span of $3 between highest and lowest should give rise to caution among dairy farmers budgeting for the new season to cover much higher farm expenses.
Westpac senior agri economist Nathan Penny, an analyst of long standing with a reputation for optimism, said increasing Chinese demand and the relatively low New Zealand dollar will deliver $10/kg milksolids in 2023-24.
ASB economist Nat Keall said improving Chinese demand is being offset by weaker dairy consumption elsewhere and that $7/kg is a reasonable forecast.
ANZ agricultural economist Susan Kilsby sits in the middle at $8.50, having just trimmed both the current season prediction and 2023-24 by 25c because dairy commodities have not rebounded as she hoped.
Penny said the reopening of the Chinese economy after covid lockdowns has already lifted the tide in sheepmeat and export logs.
“It is a matter of when, not if, lifting Chinese demand translates into higher dairy prices.”
As NZ’s largest market, China has an over-sized impact on global dairy prices. Its share of NZ dairy purchasing fell from 43% in November 2021 to 30% currently, matched by the fall in dairy prices.
“Other key markets in the rest of Asia picked up the slack, although at lower prices than China had been paying.
“Looking over the remainder of 2023, we expect Chinese buyers to return in greater numbers in line with their average buying patterns over 2020 and 2021,” Penny said.
Milk production in the United States, Europe and NZ has picked up but will remain subdued, he said.
“All up, we expect global dairy prices to firm over the course of 2023.
“While the lift will come too late for this season’s forecast, it does set up 2023-24 for a bumper milk price.”
Keall said the ASB team thinks lower demand is now the dominant market theme.
“Understandably, a less certain outlook for the global economy and the prospect of weaker consumption in many parts of the world are weighing on buyers.
“With milk production also getting past its lows, the balance of supply and demand has shifted markedly.”
Bidders on Global Dairy Trade are securing what they need without needing to go on the offensive, and China’s return to GDT isn’t pushing prices higher.
China’s volume of whole milk powder has risen but other markets are increasingly stepping back.
“We expect this to remain a theme over the course of the next season, with improving Chinese demand offset by weaker dairy consumption elsewhere.
“What’s more, with local production strong and dairy stocks still healthy, there’s a limit to what Chinese processors will be prepared to pay for now.
“With global dairy supply past its lows and softer global growth set to weigh on demand, we don’t see prices mounting a dramatic comeback.”
At ANZ, Kilsby is cautious concerning next season’s milk price, saying the decline in dairy commodity prices of the past few months is unlikely to abate due to expanding world milk supplies.
The futures market and the forward sales on GDT point to a flattening line a little above $8 for the farmgate milk price.
The NZD is expected to firm over the medium term but that influence will be muted by the foreign exchange hedging policies of the dairy companies.
“Global dairy markets are not quite as robust as we hoped, which will put downward pressure on prices.
“But as demand from China improves this will help to soak up the surplus dairy products currently available.”
Penny acknowledged that dairy farm margins will remain tighter for longer after revising the current milk price down by 35c to $8.40.
But his very optimistic $10 for next season plus some moderation in the growth of farm costs should recover some of this season’s lost ground for operating margins.