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.
BNZ's new forecast is the highest for this season and trumps Fonterra's forecast midpoint by 25c.
The bank's senior economist Doug Steel believes that another season of buoyant milk prices is pencilled in. Last season's milk price, to be finalised in October, is set to top $10/kgMS for the first time.
Steel says their previous milk price view was built during a dip in Global Dairy Trade (GDT) prices and with expectations the New Zealand dollar would have pushed higher by now. GDT prices did fall a cumulative 7.4% from a recent peak in early May to early July.
"But changing factors like world growth expectations edging higher, weather conditions and disease affecting milk supply in parts of the EU, rising global fertiliser prices, reports of continued milk production weakness in China, and resolution of a trade dispute between NZ and Canada collectively suggest a stronger dairy outlook than we previously anticipated," he says.
Last week's GDT auction saw the price index rise 0.7%. The price for flagship whole milk powder rose 2.1% to US$4012/metric tonne.
Steel says the latest GDT auction supports the case at the margin.
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"The small 0.7% lift at that event was arguably a bit stronger than it looked, given prices tend to fall at this time of year as volumes lift, and despite a headwind from a stronger USD since the previous event," he says.
"On our reckoning, both Fonterra's $10 milk price forecast for the 2025/26 season and our own $10.25 view are consistent with some mild decline in GDT prices from current levels. If GDT prices don't ease from here, a milk price a touch higher than both forecasts could be expected."
More broadly, he says the scope of possible outcomes for this season's milk price remains very wide. Further improvement in global growth forecasts and demand, or tighter than expected supply, present upside risk, he says.
On the downside, there is still plenty to fret about that could materially and abruptly alter the trajectory for prices ahead. The world growth outlook and trade environment are fragile, while geopolitical tensions don't look like vanishing anytime soon, notes Steel.
Also, above average inflation-adjusted prices could encourage more milk from those that can increase production.
"That still feels like a question of when, not if. Dairy prices are high relative to global grain prices. For example, the dairy price to corn price ratio is at its highest level in more than 10 years. US milk production is already pushing well above year earlier levels," says Steel.
He says eyes are also on the new NZ production season as it really starts to ramp up.
"It is off to a strong start. After lifting 3% last season, NZ production is assumed to lift 2% this season. Less volume than that would present some upside risk to our milk price view, at the margin, and vice versa if production is stronger."
Chinese Stockpileb
Low Chinese inventories could help keep whole milk powder prices up in the coming months.
According to NZX markets analyst Lewis Hoggard, Chinese inventories of WMP were up 19% month-on-month in the most recent update for June, however, down 63% year-on-year, which continues to be a bullish sign.
"With buyers caught short in Q4 last year due to declining raw milk production, if inventories begin to fall again, then we expect there will be decent support for WMP prices around these levels over coming months."
However, Hoggard cautions that a potential bearish counterweight to this could be increased NZ supply, as Fonterra recorded a +43% year-on-year result in June for South Island collections, although this is at the seasonal low point in the curve.
