Dairy commodity prices reached record heights earlier in 2022, leaving many wondering whether we have yet reached peak powder prices. While milk production is in the midst of a significant slowdown, weakening demand expectations are creating the scenario for some moderate price declines in dairy commodities during the second half of 2022. Rabobank’s view is that we passed peak powder prices for this price cycle in the first half of 2022.
For the first time since 2016, milk production growth in the major exporting regions (New Zealand, Australia, South America, the US and EU) has been weaker than the prior year for three consecutive quarters. Global milk production has been hindered by record-high input costs and weather-related issues, impacting margins. Elevated milk prices have not translated into guaranteed milk production growth and with global herds having contracted or facing barriers to growth, alongside corn and soybean prices at close to record highs, the milk production recovery in Q3 2022 will be a modest rebound.
Chinese dairy import dynamics are key to the global dairy demand outlook and central to NZ’s farmgate milk price direction. Strong domestic milk production, coupled with weaker consumer demand (due to covid-related measures) at a time of high inventories, is resulting in lower dairy imports at present. Total imports (measured in liquid milk equivalents, excluding whey) are already 4% lower for the first four months of the 2022 calendar year.
Soaring domestic Chinese milk supply growth in Q1 2022 of 8% year-on-year (YOY) and high carry-over stocks from last year’s strong imports are colliding with weaker demand due to restricted movement. Lockdowns in China have exacerbated and slowed down the oversupply situation, considering still roaring domestic milk production growth and the continued growth of powder imports (+3% YOY) during Q1 2022. We expect this to continue to feed pressure back up the supply chain to farmgate milk prices within China, as well as put pressure on global dairy commodity prices. With the Chinese farmgate milk price dropping, we are seeing imported NZ milk products become less competitive with the locally produced WMP.
Across most regions, consumers are feeling the significant impact of inflation in their purchasing power. In the US and the EU, inflation at a 40-year high is a shock to the consumer and impacts lower-income families disproportionately. In emerging markets, inflation is not new, but the severity of the current rise in prices, especially for commodity-importing countries has been amplified by the effects of the war in Ukraine and a very strong US dollar. Still, high oil prices could support dairy import demand for some oil export countries as we’ve seen in previous commodity cycles. Rabobank anticipates the supply shortfall will be met by demand weakness, helping to keep a lid on bubbling commodity prices, for now.
Fonterra’s 2022-23 opening forecast farmgate milk price range has come in strong at $8.25- $9.75/kg MS. The wide range reflects current market dynamics, with global supply constraints paired with strong market demand supporting the upper end of the range in particular. Rabobank shares this viewpoint, with our forecast of $9.00/kg/MS set at the midpoint of Fonterra’s range.
Covid and geopolitical-related events are creating unique demand situations, but the constrained supply will continue to buffer the full effect of these demand conditions providing a healthy farmgate milk price for NZ dairy farmers.
Ultimate profitability for NZ farmers in the season ahead will come down to managing costs in an inflationary environment. Like other farmers across the globe, NZ farmers are juggling more expensive input cost pressures than in prior seasons. We anticipate key input costs for dairy farming – fuel, fertiliser, feed, and labour – to remain elevated throughout 2022, and likely 2023 too.
The good news is farm profitability looks likely for most dairy farmers, albeit with smaller margins compared to the season prior. It won’t all be plain sailing though, so buckle in for some bumps along the way, but the destination ahead is still looking good for NZ farmers.
This article first appeared in the July 2022 issue of Dairy Farmer.
