Westpac Urges Farmers to Prepare Now for El Niño Drought
Westpac NZ is calling on farmers and growers to start preparing now for the possibility of a dry summer, as likely El Niño conditions raise the risk of drought across parts of the country.
He says the steep price fall over August comes as several countries battle renewed outbreaks of COVID-19 and as total global case numbers continue to increase rapidly.
“Indeed, some dairy markets and trade hubs such as Hong Kong, Singapore and Vietnam that were successfully containing COVID-19 have seen cases spike over August,” says Penny.
“With this in mind, it appears that dairy markets are acting on this renewed risk and have pushed prices lower.”
He made these comments after last week’s Global Dairy Trade (GDT) auction recorded its third straight drop in dairy prices.
The key whole milk powder prices posted a 2.2% drop, while overall auction prices slipped 1.7%. Over the two auctions this month, WMP prices have slipped 9.5%, while overall prices have fallen nearly 7%. Prices are back below their pre-COVID-19 levels after having wiped those price losses over July.
Penny told Rural News that things have changed since the COVID-19 sweet spot over early July.
“At that stage, by-and-large, key dairy markets such as China and South-East Asia were seeing low and relatively stable case numbers, with lockdown restrictions generally easing as a result.”
He expects outbreaks to wax and wane but says, generally, most key dairy markets (notably China) continue to manage COVID-19 well.
As countries get on top of virus flare-ups some of the August price falls may prove temporary.
On the flipside, if the virus continues to surge in key markets, then prices are likely to fall further.
RaboResearch dairy analyst Thomas Bailey notes that the dairy market is in a period of high uncertainty.
Bailey points out that US spot cheese prices have seen a 100% increase followed by a 40% decline since April.
“This level of extreme volatility may be behind us at this stage, but it is a reminder of the magnitude of volatility we have seen this year, and higher than normal market volatility is expected for months to come,” he says.
At last week’s auction demand from North Asia (primarily China) increased while other key buying regions stepped back their purchases considerably.
Bailey thinks while the Chinese national strategy might be to maintain larger inventories of dairy powders for food security purposes. The same is unclear for other markets such as South East Asia where such financing may not be an option or a focus within national programs.
NZ milk supply
All eyes will be on New Zealand milk production as the southern hemisphere production ramps up.
From a supply perspective and with spring around the corner, the normal lift in NZ dairy production will begin to weigh on prices.
Westpac’s Nathan Penny says the other dynamic in play will be spring weather and growing conditions.
“As this plays out, we will look to NZ production growth versus a year ago for additional direction to dairy prices.
“At this early stage and anecdotally, a mild winter has set up farmers well for a strong start to spring.”
Westpac is maintaining its $6.50/kgMS forecast payout for the season.
