Dairy prices remain high after overnight auction, boding well for next season

Wednesday, 19 May 2021

Dairy prices remain elevated after the latest global auction.

Dairy prices slipped in the overnight global auction although they remain elevated, boding well for payments to farmers for next season, analysts say.

Both the global dairy trade price index and the whole milk powder price index eased 0.2 per cent.

Whole milk powder prices have the most impact on what farmers are paid. The average price of whole milk powder gained US$8 (NZ$11) a tonne to US$4123/t, which is 54 per cent higher than a year ago. While prices fell for the two nearest contracts at the overnight auction, prices for later dated contracts increased, signalling future demand remains strong.

“This result, even though it is lower than the last event, does provide evidence that demand for dairy remains robust,” said NZX dairy analyst Stuart Davison. “Buyers are still very happy to pay more than US$4000/t for New Zealand whole milk powder and there seems to be no stopping demand at this point in time.”

Fonterra factors in fat and protein levels in milk when buying it off farmers.

* Demand for whole milk powder 'strong' at overnight auction, analyst says

* Westpac says the dairy industry is in a 'sweet spot' that's set to continue

Davison said the latest auction suggested a positive outlook for the upcoming dairy season, giving farmers “some confidence that a high milk price is possible again”.

Fonterra is expected to release its first milk price forecast for next season by the end of this month.

ANZ agriculture economist Susan Kilsby said prices were still “extremely high” and appeared to have stabilised at this level.

“Overall, dairy commodity prices are holding at a strong level,” she said. “There is no doubt prices will fall at some point but for now the markets remain strong.”

Kilsby said there was unlikely to be a strong surge in global milk supply in the near future as supply in most regions remained constrained by environmental regulation or high feed prices.

For this season, Fonterra has forecast a milk price for farmers of between $7.30 per kilogram of milk solids and $7.90 per kgMS, with a mid-point of $7.60 per kgMS.

Westpac senior agri economist Nathan Penny said he expected Fonterra to lift and narrow its range in the week ahead, towards his forecast of $7.90 per kgMS, given the strong prices over recent auctions.

ASB kept its $7.60 per kgMS forecast unchanged for the current season, noting it was now “late in the day” for a change. But ASB raised its forecast for next season, lifting it 70 cents to $8.20 per kgMS, which would make it the second-best payment on record after the $8.40 per kgMS payment in the 2013/14 season.

“Prices are holding onto their gains and we find ourselves increasingly bullish about the next season,” said ASB economist Nat Keall.

He noted all whole milk powder contracts were trading above US$4000/t, with the September contract trading at a premium.

“The indications suggest that prices will hold their momentum well into next season, particularly during the crucial months when Fonterra does most of its shipping,” Keall said. “The upshot is whole milk powder prices hold up higher for longer.”

While there is an element of educated guesswork looking so far into the future, “we still feel farmers can be increasingly confident of another strong season,” Keall said.

Economists’ expectations for next season range from $7.30 per kgMS to $8.20 per kgMS.

Whole milk powder buying at the latest auction was dominated by China, where a wealthier population and an increased focus on health and wellbeing after the Covid-19 pandemic is stoking demand for better nutrition.

Dairy products are New Zealand’s largest commodity export and Fonterra estimated milk payments to its 10,000 farmer suppliers for this season would contribute about $11.5 billion to the economy.