Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
BNZ senior economist Doug Steel told Rural News that this would be a remarkable achievement.
“Dairy prices have firmed up in recent months, six months ago there were dire forecasts,” he says.
“If global prices maintain recent strength, our calculations suggest this season’s milk price will be close to last season’s $7.14.”
BNZ is forecasting a milk payout of $7/kgMS for the 2020-21 season. Last month Fonterra lifted its milk payout midpoint range by 20c to $7.
Fonterra chief executive Miles Hurrell says China is continuing to recover well from Covid-19 and this is reflected in recent Global Dairy Trade (GDT) auctions.
Hurrell noted strong demand from Chinese buyers, especially for whole milk powder, a key driver of the milk price.
Steel says that New Zealand farmers enter the second half of the dairy season with less trepidation than at the start of the season in June.
“The economic bounce back from the initial Covid restrictions around the world has been stronger than many predicted.
“This, including Asia doing better than elsewhere, has set a better backdrop for dairy demand.”
GDT prices have increased about 12% since the start of the season.
Covid vaccine hopes have also buoyed risk appetite and the prospect of better medium-term economic conditions, Steel says.
“It brings the potential for better dairy demand and prices ahead.
“There are already signs of this demand with the number of unsatisfied bidders in the early-December GDT auction reaching its highest level since April 2019.”
However, Covid remains the biggest threat with many countries still struggling to contain the virus. The food service sector, including restaurants and bars are struggling to remain open under government-imposed restrictions.
There are also geopolitical risks and trade tensions simmer.
Steel says the supply side is important too.
“Global milk supply has been growing, but not excessively so,” he says.
“NZ milk production in October was only 0.3% higher than a year ago, a marked slowing as some areas got a bit dry after what was a strong start to the season.
“To the extent that this slowdown has helped support prices recently, it may not last long, as recent rain should see NZ milk production comparisons to a year earlier improve somewhat ahead.”
BNZ is forecasting milk production for the entire season to be “a touch over 1%” over last year.
