When will global milk production hit a tipping point?
With global milk prices falling, the question is when will key exporting countries reach a tipping point where production starts to dip.
Global demand for dairy remains strong and on the supply side, last week's devastating floods in Canterbury could peg back New Zealand milk production which had seen big increases in March and April.
The head of derivatives at investment firm Jarden, Mike McIntyre, told Dairy News that the "general view is that an $8 milk price is how things look at this stage".
But McIntyre says a lot of water needs to pass under the bridge before that milk price is realised.
"That's the nature of commodities," he says.
Last week's Global Dairy Trade recorded a 0.9% drop in the price index and a 0.5% drop in the whole milk powder (WMP) price.
Jarden notes that there have been small movement in prices either way over the past five auctions.
"After the 21% jump in WMP prices in March, we were bracing for a period of volatility. That's not the case."
Jarden thinks if WMP price remains above US$4,000/metric tonne and the exchange rate hovers between US72-75c, an $8 payout is on the cards.
He says unexpected events like the recent Canterbury floods could come into play. While he didn't expect it to dent milk production this season, parts of the region would be impacted.
"There was a view offshore that New Zealand would ramp up production as prices rise," he says.
"We are mostly a pasture-based system and unlike the US, EU and even Australia, we cannot use supplement feed to raise production.
"And, also environmental regulations around nitrates mean it will be difficult for our farmers to increase production without raising the ire of regional councils."
Westpac senior agri economist Nathan Penny agrees that the Canterbury floods pose minimal risk for the new season's production outlook.
"Notably, many farmers have lost winter feed during th efloods, with feed stores already low given dry conditions.
"While this may not necessarily impact production levels from the spring, any additional adverse weather events certainly will."
Penny expects a 2% lift in nationwide production this season. He believes the very strong milk price likely to drive production higher, even with compliance and regulatory constraints acting in the opposite direction.
Penny says risks to its 2021/22 farmgate milk price of $8/kgMS remained balanced.
Fonterra has announced a Farmgate Milk Price range for the 2021/22 season of $7.25 - $8.75/kgMS, with a mid-point of $8/kgMS.
Synlait has also come out with an $8 forecast.
Chief executive John Penno says commodity pricees have continued to outperform expectations, predominantly due to strong Chinese demand, combined with a relatively stable exchange rate.
