Saturday, December 2, 2023

Rabobank cuts milk price forecast

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Global dairy chain participants ‘have all faced significant pressures’ in early 2023.
Rabobank senior agricultural analyst Emma Higgins says business success in 2023 will hinge on the sector’s ability to adopt a back-to-basics approach focused on reduction of business costs and selection of the right supporting team.
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Dairy producers, processors and consumers are all feeling the squeeze and a slight lift in global production, coupled with reduced demand, has led Rabobank to reduce its 2022-23 forecast from $9 to $8.50.

In its Q1 2023 Dairy Quarterly report The Squeeze Is On, Rabobank says global dairy chain participants have all faced significant pressures during the early part of 2023.

“Dairy producers’ milk prices have tumbled from their lofty 2022 levels while their cows digest new-crop feeds and forages priced at record highs,” Rabobank senior agricultural analyst Emma Higgins said.

“Dairy processors and co-operatives are also feeling the pinch, having entered the year with expensive inventory, made with high-priced milk, which is now being discounted to clear the markets.

“Meanwhile, consumers have been hampered by higher inflation and rising interest rates, resulting in more frugal purchasing behaviour. And while they haven’t left the dairy aisle, they are looking for value.”

The report says global milk production is expected to return to year-on-year growth in 2023, following a decline of 0.9% in 2022.

“Milk production from the Big 7 export regions (New Zealand, Australia, the US, the EU, Argentina, Brazil, Uruguay) is anticipated to grow by 0.7% year-on-year in 2023,” Higgins said.

“This is slightly back on our earlier forecast of 1% growth, with this marginally lower growth attributable to increased culling in the US and weather-related production challenges in New Zealand, Brazil, and Argentina.

“Since our last quarterly report in mid-December, the midpoint of Fonterra’s forecast range has moved from NZD 9.25/kgMS to NZD 8.50/kgMS,” she said.

“And we’ve now decreased our own farmgate forecast, dropping this to NZD 8.50/kg MS, from NZD 9.00/kg MS previously.

“But, with the re-opening of China, we do see the possibility of strengthening dairy demand flowing through to improved farmgate prices by the season’s end. And this does provide some upside risk to our new forecast.”

The report identifies several watch factors for dairy sector participants over coming months including developments in the South American dairy sector, the impact of China’s re-opening on dairy consumption, and ongoing geopolitical unrest.

“South America is facing headwinds in both production and consumption,” Higgins said.

“Drought conditions intensified in the south of Brazil as well as in Uruguay and Argentina during late 2022 and early 2023, reducing milk output in the region. Farmers’ margins also worsened in Argentina and Uruguay due to higher costs, while Brazilian milk producers benefited from higher farmgate milk prices in January.

“However, milk prices are already showing signs of declines in Brazil as consumption weakens further. Slowing economic activity due to persistently high inflation and the government’s worsening fiscal balance are already translating into higher unemployment and less purchasing power for Brazilian consumers.”

The report says China’s “same-store” sales growth (sales from existing stores) in 2023 is expected to improve from last year, but remain below pre-pandemic levels.

“But we do expect foodservice revenues in China will exceed pre-pandemic levels this year, with revenues tipped to improve by 1-2% from pre-Covid levels due to additional volume and value growth from outlet expansions,” Higgins said.

The report says geopolitical unrest is a further factor to keep an eye on as it continues to cloud supply and demand estimates.

“The intensifying Russia-Ukraine war increases the risk of higher feed costs around the globe for a second year, through rising farm input costs,” Higgins said.

The chaotic summer weather is the latest curveball in a challenging season for New Zealand’s dairy farmers.

“Farming conditions and milk supply generally improved over the Christmas period, with a supply comeback meaning season-to-January production was just 2% behind last year,” Higgins said.

“Yet by February, the Southland/Otago region had moved into incredibly dry conditions.”

Conversely, Cyclone Gabrielle hammered parts of the North Island, causing widespread impact on pastures, crops and supplementary feed, along with milk supply in selected areas.

“In light of these factors, we expect New Zealand milk production is likely to slide lower by around 1.5% year-on-year for the full 2022/23 season (through May 31, 2023).”

The Farm Expenses Price Index showed dairy farm expenses were 17% in Q4 2022 compared to the prior year.

“Interest rates are the key contributor, with the Reserve Bank of New Zealand recently hiking the Official Cash Rate (OCR) to 4.75%– a far cry from the 1.0% OCR of early 2022,” Higgins said.

“Fuel and fertiliser costs, followed by feed costs, are proving the next-biggest headaches.

“However, the worm has turned downward for benchmark fertiliser costs, providing some optimism for input price relief over the coming months.”

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