Not a 'super-cycle downturn'

Higgins points out that in the last dairy downturn – 2014/15 and 2015/16 seasons – the milk price plummeted from $8.40/kgMS in 2013-14 to $4.40/kgMS within one year.

“If we adjust for inflation, that’s like the milk price in today’s terms sinking from almost $10.60/kgMS to $5.50/kgMS,” she notes.

Her comments come on the heels of Fonterra reducing its forecast milk price for the season by $1/kgMS this morning.

The co-op’s new forecast milk price range is $6.25/kgMS - $7.75/kgMS.

Higgins notes that following this week’s GDT auction, dairy commodity prices are now below 5-year averages.

“This is a significant adjustment in dairy commodity pricing – an adjustment which has been happening since Q2 last year,” she says.

“It will be painful for those going through this period of adjustment.”

At the same time, farmers are facing rising costs, which have lifted 13% year-on-year (YOY).

Higgins says the farm price expense index for quarter one of this year (Q1 2023) shows all input costs have lifted 13% YOY compared to Q1 22.

The biggest needle mover is interest rates, jumping 50% YOY, followed by fertiliser (+11% YOY), dairy shed expenses (+11% YOY) and insurance premiums (+9% YOY). Over this period, Fonterra’s farmgate forecast mid-point dropped 11% YOY.

But Higgins says there is some optimism for pricing out there.

She says the triggers for a rebalance within China are in play.

“Milk prices are shifting lower, cost pressure is being felt, farm expansion is slowing.

“China reopening is occurring, but the demand settings are weak and uncertain.”

Outside of China, RaboResearch believes inventory levels in dairy markets are low.

“This is a key difference to the dairy downturn period, where some dairy commodity prices – particularly skim milk powder (SMP) – were under pressure for an extended period due to intervention stocks in the EU.

“Another key difference to the dairy downturn is that the supply outlook this time around is much more modest.

“Whether it’s cost pressure in the US, weather issues in parts of the EU, or even looking further ahead to El Nino risks, the challenge is clear for milk supply growth from major exporting regions.”