Saturday, December 2, 2023

Is that a blip or a bellwether? Milk Monitor weighs in

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Each month the Milk Monitor delves into the dairy industry and gives us the lowdown on the good, the bad, the ugly and everything in between.
Westpac senior agri economist Nathan Penny says the April 18 GDT bodes well for the $10/kg MS forecast for the new season.
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This article first appeared in our sister publication, Dairy Farmer.

The dairy market surprised everyone when it jumped 3.2% on April 18 after previously limping along to the end of the season with four consecutive downward auctions.

Prior to this result, WMP prices fell 5.2% at the April 4 auction, and at a weighted average of US$3053/MT, WMP prices are now at their lowest point since the eye of the pandemic in 2020, ASB said in its Rural Economic Note in early April.

It also pointed out that all major GDT products are now down 30-45% on an annual basis.

So is it a blip? 

Westpac senior agri economist Nathan Penny says it was well above his expectations; he had anticipated a 1% fall in WMP prices.

He cautions that overall prices are still 6.1% down for the year.

The result re-affirms the bank’s $8.30/kg MS forecast for this season – the same as Fonterra’s after it lowered its forecast midpoint range by 20 cents in late March in response to the auction declines.

ASB economist Nat Keall says while the result is pleasing, it has removed some but not all of the risk of that forecast falling below $8.30. 

While Fonterra’s new midpoint will sit below the break-even milk price on some farms, the only – if very mild – consolation is that the fall has come at the end of the season and not at peak milk.

So what does the new season hold? With a $3 difference between the highest and lowest forecast by the banks, the figure Fonterra will arrive at in May is anyone’s guess.

At the high end, Penny has maintained a $10/kg MS forecast, saying the latest result bodes well, despite it being early days.

Penny says increasing Chinese demand and the relatively low New Zealand dollar will deliver this high payout.

“As the Chinese economy gains momentum over the course of the year, following its reopening, we expect improved Chinese demand will lift global dairy prices.

“And very subdued global milk supply will improve additional support for prices.”

At the opposite end is ASB, which has stuck with its $7/kg MS forecast for some time now. Keall says the low forecast “raised eyebrows” when it was launched because futures pricing was as high as $8.85/kg MS at the time.

“Over the past couple of months, prices have moved much closer to our view as auction prices have underperformed. It’s a long time until the thick of the season and Fonterra’s opening guidance range will be very wide, but we expect a substantially lower midpoint than the last two seasons have opened with.”

Keall says improving Chinese demand is being offset by weaker dairy consumption elsewhere. And the Chinese economy will only provide partial relief for global commodity prices, he says, pointing to International Monetary Fund global growth forecasting where China was an exception because so much of the country was in covid-19 lockdown.

The IMF and the broader consensus view see Chinese growth rebounding from circa 3-5.2%. Keall says this is a modest number compared to a 9% lift in 2021 and the 7-14% annual expansion seen from 2008-2018.

“Barring a surprise elsewhere, a figure in that 5% ballpark would see the global economy growing at its second-most sluggish rate since the Global Financial Crisis,” he says.

For dairy, he expects demand to stay sluggish. China accumulated substantial whole milk powder stocks during 2022 amid strong local dairy production and covid-driven disruption to usual consumption patterns.

Growth among the world’s major dairy importers is also set to soften when weighted by their share of global whole milk powder imports – down from about 3.7% in 2022 to closer to somewhere in the 3-3.5% range this year, he says.

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.

Speaking to Farmers Weekly, Kilsby says she 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 an $8 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,” Kilsby says. 

“But as demand from China improves this will help to soak up the surplus dairy products currently available.”

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