By Alexandria Winning-Browne, NZX dairy analyst
Following months of commodity prices sliding, milk prices in other major dairy regions are now showing signs of weakness, with expectations of a year of tight profit margins for both US and European dairy farmers in 2023. The only region that is expected to see milk prices increase in the near term is our Aussie mates, where the local dairy market is extremely disconnected for the time being, with supermarkets driving milk prices higher for what seems the first time in memory.
The USDA has announced last week that they forecast milk prices in 2023 to slide nearly 15% over the year, with profits expected to slide circa 18% over the same period. On the upside, the Dairy Margin Coverage Program (DMC) will likely increase in 2023, by US$156.7 million on the year prior. However, other government-funded payment programmes are likely to decline. This combination of lower milk prices and lower relief packages are set to see US dairy farmers as the most impacted of all livestock farming producers in the US in 2023.
This forecast fall in profit margins and milk prices puts previous forecasts of growing US milk production during 2023 at risk, with the US Dairy Cow Slaughter figures already showing that factors are changing. The pipeline of replacement heifers is again below replacement levels, with new forecasts that the national US Herd is under pressure of growing in the near future. This means, for total milk production to grow this year, it will be only viable via per cow production increasing. The USDA’s current forecast for milk production growth sits at 0.8% YoY growth during 2023; however, we would expect the USDA to keep adjusting this forecast lower during the year.
Looking across the pond into Europe, a similar story is playing out for EU dairy farmers, with milk prices falling across major producers, while milk production for the continent has managed another lift in the tail end of the late season flush.
Irish processors are trimming their milk prices paid to suppliers during January, with Ornua reducing their pay out to 49.1c/l, Lakeland cutting 6c/l down to 52.85c/L, while Kerry Group has cut their milk price by 6c/l also, to 50c/L. All three processors quote the conditions facing consumers, such as inflation and market sentiment, as the drivers for these changes.
Even without all of European milk production data collated by Eurostat, which is a common occurrence, there is an estimated 0.9% YoY increase of milk production in December. Irish farmers made the biggest percentage gain for production in December, increasing 7.4% YoY, while the massive dairy production hub that is Germany increased milk production by 3.1% YoY, on 2.66 million tonnes of production for the month. Only Italy and France have so far reported declines in production during December, down 3.6% and 1.3% respectively.
When the final data is tallied, Europe’s total milk production figure will likely result in a slightly negative figure on the year prior, something that can be seen clearly in their export figures following December’s export figures. All major classes of dairy exports resulted in negative full year exports, with the exception of Infant Formula exports, which increased 12.3% compared to full year 2021 figures. EU Skim milk powder exports reduced circa 10% during 2022, while whole milk powder exports eased 22%. EU Butter and AMF exports also eased 11% and 18% respectively. It must also be noted that even though full year SMP exports are lighter than the year prior, December exports of SMP are recorded as 23% greater YoY, one of the key drivers to the recent weakness in SMP prices.
All expectations from within both markets are for farmgate prices to weaken throughout the 2023, on the assumption of dairy commodity prices remaining weak throughout the year
GDT Pulse 16 – Neutral
Global Dairy Trade (GDT) Pulse action number 16 resulted in regular spec whole milk powder (WMP) prices easing 0.5% from the price achieved at the previous Pulse auction, and only US$10/t lower than the C2 regular WMP price achieved at the first GDT Event of February. Interestingly, this auction saw the most winning bidders over the 16 Pulse auctions so far, which implies that the winning bidders purchased the smallest per bidder volumes.
Following the large gain in WMP prices from GDT325, this support is somewhat encouraging, but not enough to suggest the market is ready to rally higher.
All 1000t of WMP offered was sold, bringing the total volume of WMP sold via the GDT Pulse auctions to 15,725 over the last 16 auctions.
Looking into the 2023-24 season
As mentioned above, the bulk of expectations from around the world are for dairy commodity prices to continue to be under pressure during the rest of the 2022-23 season, with inflation, recession and increasing geopolitical tensions as the top three threats for the market over the coming months. It would be remiss to exclude any of these risk factors from expectations for the coming year, but as we are now halfway through the first quarter of 2023, we are starting to get a better insight into what the start of the coming season is likely to look like.
The first signal we have is that last week’s Global Dairy Trade (GDT) auction resulted in lifting forward sales curves for WMP prices; a trend that buyers are willing to pay a premium for WMP for product produced in four to six months’ time. Helping to support this trend has been recent trading on the SGX-NZX Dairy Derivatives market, with WMP futures prices lifting between 4% and 6% over the nearest six contracts over the last month. WMP to be shipped in July was sold at GDT 325 for US$3395/t, while the future for the same delivery period is sitting at US$3565/t at the time of writing, implying that WMP prices are expected to keep increasing from the current price point as move into the new season.
It is important to note that while the WMP futures forward curve is currently in a contango shape, which means futures are more expensive at later dates and the market is implying that oversupply is in play currently. WMP futures traders are willing to pay a “carry,” an addition to the underlying commodity value for the producer to store the product until the buyer needs the product. Over the last month this forward curve has started to flatten and is a signal worth watching over the next few months. When demand returns in the physical market in strength, the futures market should move into backwardation, which is when the market is saying “I will rather pay more for product now than later”. Taking heed from the current flat forward curve into the first four months of the coming season, it could be suggested that traders are expecting more physical demand in the new season.
The milk price futures market is also suggesting the same expectation of increased support during the 2023-24 season, with this future now priced at $8.83/kg MS, gaining 30cents/kg MS over the last month. With 22 months till settlement of the ’23-24 farmgate milk price is announced by Fonterra, and GDT auctions only beginning to probe into commodity prices for the coming season, milk price risk remains heightened. Conversely, the risk in the current season’s milk price is reducing as we move through the tail end of the current season. There is less than 25% of this season’s GDT volumes left to sell, and we expect Fonterra to announce another update to their milk price forecast in the coming fortnight.
