Thursday, 28 February 2019 15:43

New dairy price cycle looming

Written by  Sudesh Kissun
Nathan Penny. Nathan Penny.

Conditions are in place for the start of a new dairy price cycle, says ASB senior rural economist, Nathan Penny.

A tighter global dairy supply and firming demand for milk products are setting the scene for further price rises

His comments came as Fonterra today lifted its forecast milk payout for 2018-19 season by 30c; from $6 to $6.30/kgMS range to $6.30 to $6.60/kgMS range.

Penny says the revision was at the top end of the bank’s expectations. 

“For example, we had revised our own forecast up by a more modest 25 cents earlier this month.”

Penny notes that the revision reflects the tightening in dairy markets over the past three months.

Dairy auction prices have lifted 17.3% since Fonterra’s last update back in early December. Catalysts for the improvement include tighter global dairy supply and ongoing firmness in demand. 

Supply growth is soft the EU and US, with supply outright falling Australia. 

Meanwhile, it’s likely that recent hot weather means that NZ supply growth is past its peak, Penny adds. 

“Global dairy stocks are also much lower than in previous years. 

“EU intervention stocks had been a buffer against any supply tightness; however, now these stocks have been sold down, making dairy supply vulnerable to shocks. Indeed, our view is that the conditions are in place for the start of a new dairy price cycle.

“With that in mind along with Fonterra’s announcement today, we place our 2018/19 milk price forecast of $6.25/kgMS under review. Importantly, the cycle is priming the 2019/20 season as evidenced by our initial 2019/20 milk price forecast of $7.00/kgMS (set last week).”

Penny also noted that while the milk price was humming, Fonterra’s corporate performance continues to disappoint. 

Fonterra has revised down its 2018/19 forecast earnings per share by 10 cents to 15-25 cents/share. Fonterra also announced that it will not pay an interim dividend this year. Using the midpoint of its forecast and Fonterra’s current 70% dividend policy implies a forecast dividend reduction of 7cents/share for the year, Penny says.


More like this

Forecasts steady as demand holds

Banks are mainly holding firm on their forecasts of $7/kgMS despite last week’s flat Global Dairy Trade result – a small decline of 0.4% in the overall price index.

$8 lamb on the cards

Sheep farmers are in for another year of solid returns, says ASB’s senior rural economist Nathan Penny.

$7 payout still on the cards

Economists are still sticking to a 2019/20 season forecast of around $7/kgMS despite the 3.8% drop in the Global Dairy Trade overall price index last week.


» The RNG Weather Report

» Latest Print Issues Online

Milking It

Beating the desert heat

Three times daily in summer the Holstein cows on a dairy farm north of Doha, Qatar, placidly step onto a…

Unreliable case

A Scottish couple has had a compensation claim rejected after arguing one of their pedigree Highland cows got pregnant to their neighbour’s…

» Connect with Dairy News