ANZ Warns of Milk Price Risks as New Dairy Season Begins
The new dairy season is kicking off with plenty of risks to the forecast farmgate price, both upside and downside, says ANZ agricultural economist Matt Dilly.
The 80c jump makes the bank's latest forecast its first double digit milk price on record.
The dramatic rise is based on two factors: low global milk supply and the New Zealand dollar's direction of travel.
ASB analyst Nat Keall says that dairy prices underperformed a tad at last week's auction, where whole milk powder prices slipped 0.6%.
But he says the last auction result "is not a biggie".
Keall says, most dramatically of all, cheddar prices tumbled 9%.
"The result represents a little bit of an under-performance on futures market expectations, which had pointed to a bit more price movement.
"A modest dip isn't a big deal. It's been a volatile end of autumn and beginning of winter with markets still finding their feet after the lockdowns in China and Fonterra's decision to flex the balance of regular and instant WMP on offer over recent auctions."
Keall points out that WMP prices only need to sit around their current levels to deliver a record farmgate milk price, so every auction where they hold their ground is effectively a win.
"And as we've repeatedly emphasised, it's important not to panic off the back of modest auction-to-auction shifts.
"The dairy market fundamentals remain the same.
"Despite mounting headwinds circling the global economy, dairy demand continues to hold up well and prove relatively inelastic."
Chinese buyers appear to be lifting their purchasing, but with 'North Asia' still below where it usually is at this time of year in terms of market share, there is more room for growth.
Keall notes that the most important development recently has been the lower NZD.
He says that a fresh bout of risk aversion among investors and aggressive moves by the Federal Reserve in the US to boost US interest rates have helped snuff out any tentative lift in NZD/USD.
"We've adjusted our currency view and think it will be a while before the Kiwi takes flight again.
"Fonterra will have done something like 60-70% of its hedging for the season but, with the NZD dramatically underperforming what we once forecast, the impact on its effective exchange rate for the season will be significant. We think a $10/kgMS farmgate milk price could well be on the cards."
Keall says it may seem odd to boost their forecast after an auction where prices have underperformed.
"But it's our view on the fundamentals - and more significantly the change in our expectations for the season's effective exchange rate - that really matter."
