Fonterra has lifted its forecast farmgate milk price, hot on the heels of a huge leap in global dairy prices.
In fact, further price increases may be likely during 2021 as the Covid-19 vaccine rolls out and in-restaurant demand picks up, he says.
His comments came as last week’s Global Dairy Trade (GDT) auction recorded a surprisingly solid result, with flagship whole milk powder prices rising 5% to just 3% below the same time a year ago and just 0.4% below the pre-Covid level. Economists and the futures markets were predicting modest price rises.
Penny says it is encouraging that the milk fat price recovery is gaining momentum. Butter prices have lifted for five consecutive auctions and rebounded some 20% or so over this period; last week it rose 3.8%.
“All up, these moves indicate that the recovery in global dairy demand is on increasingly solid ground,” says Penny.
Strong demand from China for New Zealand milk continues to keep prices firms.
ASB economist Nat Keall notes that there were broad-based price lifts among all the key commodities, but the rise in WMP prices was particularly marked.
He notes that the quantity sold was about 12% lower than the previous auction.
“This is one of the more dramatic price moves we’ve seen at recent auctions. Prices were higher across the contract curve but, interestingly, it was the further-dated contracts that commanded the highest prices,” he says.
China has remained the dominant player across recent auctions, and while some buyers there have built up a decent stockpile, demand is continuing to rise, he adds.
“Dairy import volumes in China were up across the board in the latest data, with food insecurity a big theme. Although New Zealand faces growing competition from other exporters, we expect solid Chinese demand to help support prices at future auctions.”
Keall says it is likely the milk price could finish above the $6.75/kgMS farmgate price it is forecasting.
Westpac, which is forecasting a milk price of $7/kgMS, says the positive demand backdrop reaffirms its forecast.
Keall notes there are still a couple of factors that give them pause for thought when it comes to its milk price forecast. Production is one such factor. Soil moisture data from NIWA suggests that growing conditions as the summer begins might be decent.
“Production is up 1.8% season-to-date on last time around, according to Dairy Companies Association of New Zealand (DCANZ), and it might keep the farmgate price from rising too high,” he says.
“The other factor is the strength of the kiwi [dollar]. That’s another negative for our overall price forecast, given the impact on any further hedging Fonterra has to do.
“Still, the risks to our $6.75 milk price forecast are now firmly skewed towards the upside. We’re keeping an eye on our forecast and will be closely watching the coming auctions for news.”