Farmers grappling with rising costs received some good news last week.
A record milk price this season and another solid opening forecast for the new season bodes well for farmers’ income.
Dairy demand is still quite strong and supply remains constrained globally, especially in the US and Europe.
However, there are some short-term challenges: Covid, China’s most recent lockdowns and the unrest in Sri Lanka – a key market for Fonterra milk powder.
Milk prices are expected to remain at elevated levels this new season. While some economists downgraded their opening forecast payout for 2022-23, it remains at historically high levels. Dairy commodity prices are expected to continue to fall in the coming months but relatively low global milk supplies are expected to put a floor under prices later in the year.
Global risks are highly elevated at present, driving uncertainty; the Ukraine situation is adding pressure to what was already an overheated commodity market.
Oil prices have skyrocketed but continue to seesaw on headlines about how the war is progressing. Energy commodities were already in tight supply before the invasion and the supply situation is now a lot less certain.
High gas prices are pushing up fertiliser prices which, in turn, is pushing up the prices of grain and food in general.
The cost of producing milk is rising, particularly in the northern hemisphere, where indoor farming systems mean much greater exposure to high prices for fertiliser, grain and fuel. All this means New Zealand’s mostly pasture-based farming can still expect solid returns for its products.
Normally, high milk prices trigger a jump in production, but there is no strong evidence that production has rebounded.
And the models say it will take until the second half of the year to get significant production growth, with the risk being that input costs increase further, the weather holds back production or some other unexpected event comes along and knocks milk production back again.
Most economists believe dairy prices globally have probably peaked, but the downside should be limited by the high input costs, unless demand absolutely tanks. So NZ dairy farmers can look forward to another solid season, which has just kicked off.
When we work through the numbers, the record high milk price should more than offset the expenses. For most NZ dairy farmers, they will be somewhere between profitable and achieving record profitability. Yes, costs will remain high but the high milk price will ensure good times will continue.