Farmgate milk price forecasts are under pressure after the latest Global Dairy Trade auction produced a 4.6% drop in the price index, incorporating falls for the five major dairy commodities sold.
Skim milk powder fell 6.9%, whole milk powder 4.4%, cheddar 3.9%, anhydrous milk fat 2.7% and butter 2.6%.
The GDT market has taken back in October all the price gains made during September, despite Fonterra revising its milk collection seasonal forecast downwards by 1% four days before the auction.
It has given up on a production recovery this season and now expects to collect 1480 million kilograms of milksolids, the same volume as in the 2021-22 season.
“Variable weather conditions, which caused a slow start on farm, have continued, contributing to lower collections through September and early October, which has caused us to further revise our collections forecast,” chief executive Miles Hurrell said.
But that announced revision in supply did not work the expected magic for prices.
The downward demand factors are speaking loudly and now causing concern, dairy market analysts said.
“Dairy prices eased more than we, and the market, expected and we have therefore reduced our milk price forecast by 60c to $9.40/kg,” ASB commentator Nat Keall said.
“Given the ultra-tight global supply outlook, we are still picking dairy prices to head higher, but the demand just is not there right now and that weighs heavily on our forecast given prices for a huge chunk of the season’s product are being struck right now.”
Keall said he thought 25% of the season’s output would be priced and contracted during October.
He postponed the prospect of price recovery to later in the season when inventory levels in China wind down, consumption patterns hopefully normalise and auction demand returns.
Westpac senior agri economist Nathan Penny said the broad price falls are against a backdrop of economic weakness in the key market, China.
Covid movement restrictions are still weighing heavily on economic activity and the recent Communist Party congress reaffirmed those factors.
“On balance, the weak results over October combined with the weak Chinese dairy demand outlook mean that there are now downside risks to our milk price forecast of $9.25/kg.”
NZX dairy insights manager Stu Davison said the weakness showed up early in the GDT auction, with low ratios of bidder demand to the tonnage supply.
Market participants will now be revising their expectations for the next GDT auction on November 1.
“It would seem we have seen enough evidence to assume that consumer impacts are now being felt back through the supply chain, which if true, will mean that prices have further to retreat,” Davison predicted.
