Strong production, tested demand send milk prices crashing
Strong global milk production and rebalancing of demand among key buyers has delivered one of the biggest drops in whole milk powder prices in recent years.
That’s the prevailing opinion of economists on the unexpected 1.2% rise in the overall price index at the last Global Dairy Trade auction.
With growing production and lessening demand from shutdowns, economists are cautious.
Most hold their current season forecast within Fonterra’s range of $7/kgMS-7.60/kgMS but drop to $6.50kg/MS or less for next season.
BNZ’s Doug Steel is more optimistic than others saying the GDT result was better than expected.
“It is only a small rise but a very strong result in the current circumstances,” he told Dairy News. It follows four small consecutive declines.
“Prices are 12.8% below year earlier levels. Factor in a much lower NZ dollar and prices expressed in NZ dollars are similar to that achieved a year ago – and indeed at a strong, higher-than-average, level.
“It follows other indicators than show many (but not all) prices for NZ’s major agricultural products have been holding up reasonably well to date.
“This is helpful to overall exports and the economy in such a challenging environment.”
China bought more whole milk powder (WMP) at this event than previously, backing up some recent better economic indicators from there.
“More EU and US milk supply remains a threat to prices over coming months, as is the potential for softer than expected demand as COVID-19 hits economies and labour markets hard. But, for now, with such risks known, the (GDT) result implies good things about dairy demand generally.
BNZ is picking this season’s farmgate milk price will come in the middle of Fonterra’s $7- $7.60/kgMS range. “We currently forecast $6.50/kgMS for the 2020/21 milk price, but at today’s pricing and currency levels that may be a bit light.”
There may be many twists and turns, Steel says.
“In any case, to be talking anything like $6.50/kgMS or more with what is happening around the world just shows the resilience that is present in today’s market place for dairy products. Long may it continue.”
ASB’s Nathan Penny says while WMP’s 2.1% price lift was notably higher than the 3% fall indicated by the futures market, prices in US dollar terms remain lower than prior to the COVID-19 virus outbreak.
The price lift last week needs to be taken with a grain of salt.
“We remain relatively cautious on the global dairy market outlook in light of the COVID-19 developments. In other words, we will need to see further price gains or at least no further price falls, before we start to gain confidence that the worst of the outbreak impacts is behind us and that global dairy has stabilised.”
ASB has lower its 2020/21 forecast to $6.50/kgMS, from $7.50/kgMS previously and holds the current season forecast $7.30/kgMS.
Westpac’s Michael Gordon says they have revised their milk price forecast from $7.20kg/MS to $7/kgMS. For the following season, Westpac expects $6.30/kgMS (down from $7.30/kgMS prior to the Covid-19 outbreak).
“We can be sure that the near-term hit to global demand will be unprecedented; what we don’t know is how long the lockdown period will last, or how quickly the recovery will play out,” he says.
The dairy sector still has a long hard road ahead of it and the bank expects further price declines over the next few months.
“Global demand for dairy products, particularly outside of China, will be hit hard by the lockdown.”
The impact will undoubtedly vary across products. Infant formula could be considered an ‘essential’ purchase, but that’s less true of the various processed foods that use milk powder or butter as an ingredient.
“Demand from foodservices has been especially hard hit as cafes, restaurants and bakeries have been shut down.”
