When will global milk production hit a tipping point?
With global milk prices falling, the question is when will key exporting countries reach a tipping point where production starts to dip.
A price lift was expected on the back of Fonterra’s warnings of 3.3% lower production than last season. But the 19.2% surge in whole milk powder to US$2874/t had banks lifting or holding their forecasts.
ASB rural economist Nathan Penny says the overall GDT result was at the top end of their expectations. The bank is holding its $4.70/kgMS forecast at present. “We need prices to kick on a bit further but at this stage it is well on track for that and it takes away a lot of the downside risk. We would have had to revise down if things didn’t pick up soon. That possibility is off the table for now.”
In the long run over the next 10 years they see prices stabilising at about $7/kgMS but ASB’s forecast for 2015-16 is $6/kgMS. “We are also more confident of that. This season will still be tough for farmers: milk price is going to be low and production in some areas will be down where it is dry. They will have to manage through this season but they can be a little more confident of prospects for next season.”
Penny says prices were strong where it matters. “The price of key product, WMP, surged 19.2%. In addition, SMP (the second key product after WMP) rose 6.7%.
“Elsewhere it was more mixed. Butter prices continued their resurgence, rising 6.1% to be up over 50% since November 2014. Meanwhile, AMF continues to give back some of its recent gains, falling 5.4% overnight on top of the 5% fall in the last auction. In addition, there was a fall for cheddar, a rise for casein and BMP was effectively flat.
“Looking by contract, the strength in WMP was across all contracts. Specifically, the increases ranged from about 15% to 22% or $380 to $520 per MT across the five contracts on offer with comparable prices.”
ANZ senior economist Michael Gordon says the direction is not surprising given that Fonterra has given clear warnings that drought will reduce milk production in the first half of the year.
“But the price increase has come on faster than we were anticipating and we will be looking to revise our forecast for this season. It is still going to be on the low side but we are looking at [about] $5/kgMS rather than $4.80/kgMS (ANZ’s former forecast).
“It is still well below what we’ve experienced in recent years but there’s at least some mild relief coming in the form of high prices.”
Whole milk powder was where Fonterra was signalling the drop in production most strongly.
“There were some variable results; some of the fat products had some big drops. It is not… a blanket increase in demand. It signals some concerns about supply for some products, particularly whole milk powder which is where New Zealand is the dominant player.”
ANZ has lifted its forecast from $4.35 to $4.50 to $4.70/kgMS.
Rosier picture
The full GDT results were:
AMF index down 5.4%, average price US$4067/MT
Butter index up 6.1%, average price US$3783/MT
BMP index down 0.4%, average price US$2436/MT.
Cheddar index down 11.1%, average price US$2636/MT
LAC not offered
RenCas index up 7.7%, average price US$8776/MT
SMP index up 6.7%, average price US$2598/MT.
SWP index not available, average price not available
WMP index up 19.2%, average price US$2874/MT.
