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Dairy analysts and forecasters are shifting their focus from weak global milk supply to the impact on global demand from Covid and economic uncertainty.
ASB economist Nathaniel Keall points out that milk prices have always been a combination of dairy supply and consumer demand.
"But often supply has been the thing that swings around the most, particularly over the last couple of years, so it's often the thing forecasters have highlighted," he told Dairy News.
"But when global growth really slows - in the way that it is at the moment - you expect that to have an impact."
He notes that China has gone from over 8.5% growth last year to around 3.2% this year.
All that missing demand comes from chunks of the population being in lockdown.
"That stuff has an impact," Keall says.
Over the past three Global Dairy Trade (GDT) auctions, overall prices have slid by 11.5%: over the past year, prices have slipped by over 18%.
Whole milk powder prices have slid from a high of US$4,757/metric tonne in March this year to $3,279/MT at the last auction.
Keall says from a GDT perspective, it all depends on what China does and that is still really opaque.
“A lot of analysts thought it would back away from the zero-Covid policy and we’d get food service demand coming back, but if anything, the government has doubled down.
“At the very least it looks like there will be a little bit more near-term weakness.”
A weaker global economy also translates into weaker commodity prices.
Keall says less economic activity tends to mean weaker consumption, which means less demand for commodities and ultimately, less upward pressure on commodity prices.
“So all else being equal, a weaker global economy probably means a somewhat weaker milk price than would otherwise be the case.
“But we also think supply is likely to remain pretty constrained though, which will provide some support for prices.”
ASB last month reduced its 2022-23 forecast milk price by 60c to $9.40/kgMS.
Westpac has gone further, shaving 50c off its forecast price and settling at $8.75/kgMS.
Westpac senior agri economist Nathan Penny says global dairy prices have been under pressure for some time.
These recent falls are both larger and have continued for longer than the market anticipated, he notes. Penny agrees that the weakness in demand largely traces back to conditions in China.
