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.
Since November 20, 2018, dairy prices have risen; more importantly whole milk powder prices, used by Fonterra as a benchmark to set the milk price, rose a whopping 8.4% to exceed US$3000/tonne.
The GDT price index rallied 6.7% from the previous auction three weeks ago.
The average price was US$3265/t versus US$3057/t three weeks ago. Some 23,326t of product was sold, down from 27,909t three weeks ago.
What’s behind this golden mini-run?
Firm demand from Asian countries is likely to have helped to support prices.
And they are boosted by the EU starting to sell warehouse-loads of skim milk powder amassed in the last few years.
The EU had subsidised its farmers by paying them above market prices for their milk, but then storing it as skim milk powder until conditions improve.
The lift in the GDT price index and WMP prices has prompted banks to lift their forecast price predictions for the season.
They now predict $6/kgMS to $6.50/kgMS, close to the revised $6-$6.30 range Fonterra forecast in December.
Farmers will be pleased with the recent spate of price hikes, given that prices dropped last year over seven auctions before recording a lift.
Economists had long been expecting the price decline to reverse but the pace and extent of this improvement is a grand surprise. Why shouldn’t they rise more if the recent lift in demand persists?
However, some economists are cautious. There’s a risk that the pace of growth in Chinese demand for dairy products could slow as China’s growth cools generally; and if New Zealand milk production kept growing strongly it would keep a lid on prices.
NZ is set for a 2018-19 season production growth forecast of 5%, meaning the season is comfortably on track to set a record.
For farmers, there is now hardly any bad news on the horizon: production is booming and recent GDT results have overshadowed most downside risks to the forecast payout.
Everyone is confident the industry will see the milk price well exceed $6/kgMS this season. May the good times continue.
