$10 milk price still in sight despite global dairy markets softening

There has been a big rise on global milk production, putting downward pressure on prices, hovering at record levels for the past 18 months.

Westpac industry economist Paul Clark believes New Zealand dairy farmers "are well in the money" given a breakeven milk price of $8.45/kgMS and Fonterra recently confirming a payout of $10.16/kgMS - plus a dividend of 57c/share for last season.

"With a forecast milk payout of $10/kgMS and an updated breakeven milk price of $8.66/kg from DairyNZ for the 2025/26 season, farmers should still sit relatively comfortably over the coming year," says Clark.

Westpac is sticking to a $10/kgMS milk price for this season.

"Our forecast payout assumes that dairy prices will track below current levels by an average of 5% over the rest of the season.

"Much of that has to do with a big rise in global milk production, with the top five exporting regions running 2.4% ahead of a year ago."

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He says the increase in production reflects both the absence of disease, especially in the Northern Hemisphere; and farmers having been incentivised by higher milk prices to lift output levels. 

Milk production in 2024 was affected by avian flu in the US and bluetongue in Europe.

However, the fall in world prices recently has been partly offset by a more favourable exchange rate. By August, Fonterra had hedged 66% of its FX exposure for the season at a better average rate than we had assumed. The recent fall in the New Zealand dollar should help further, says Clark.

Last week's Global Dairy Trade auction saw the price index drop for the fourth straight event. The flagship whole milk powder price has dropped from US$4374/metric tonne in May to US$3696/MT last week. Butter prices also eased 3%.

NZX dairy analyst Rosalind Crickett says the latest GDT result met market expectations, as product supply remains in abundance amidst a backdrop of tepid demand.

As a result, the overall index printed a -1.6% decline to slip below the US$4000/t mark, with anhydrous milk fat (AMF) and cheddar the only products seeing respective uplifts of 1.2% and 0.8%. The lower prices at GDT 389 proved to be a drawcard for North Asian buyers, upping their purchases by 31% on the last event to account for 52% of the total purchased volume, while buying activity from Southeast Asia/Oceania was more subdued on this occasion. On the whole, 7.5% more volume was sold.

Crickett says the global milk production picture remains strong for this time of year, with recent data out of key markets - NZ, the US, EU, and Argentina showing robust year-on-year growth in both tonnage and milksolids.

"This has naturally put downward pressure on milk powder pricing with WMP easing -2.3% and skim milk powder (SMP) -0.5% (in the last GDT auction."

While the market had already factored in extra NZ volume on the platform as it follows the seasonal supply curve, strong milk production growth, and perceived lagging contracted sales from Fonterra have seen the co-op add an additional 16,500mt of whole milk powder (WMP) to its 12-month forecast of both GDT and Pulse.

Ample cream supplies globally are behind the decline in butter prices, she says.

NZ product is facing fiercer pricing competition against both EU and US product.

"While historically not a large exporter of butter, US exports are up 125% in the year-to-date," says Crickett.