Banks flagged the possibility of a cut to the benchmark New Zealand milk price forecast after dairy values fell at GlobalDairyTrade auction to a 10-month low, and entered bear market territory.
Westpac warned of “some downside risk” to it forecast that Fonterra, which processes the majority of New Zealand milk, will pay farmers NZ$9.25 per kilogramme of milk solids for 2022-23, as started last month.
The NZ$9.25 forecast is already below the mid-point of the range of NZ8.75-10.25 per kilogramme of milk solids that Fonterra is forecasting for the season.
ASB said it may be “prudent for some farmers” to accept one of Fonterra’s fixed milk price offers, even though this was likely also to mean accepting a weaker price than had appeared likely, and come in well below the $10 per kilogramme of milk solids that the bank has forecast for the season.
“No-one can predict the season with certainty,” ASB economist Nathaniel Keall said.
“Given farm input costs are almost certain to remain elevated over the season too, the certainty of locking in a chunk of output at present high prices can be valuable.”
‘Catalyst for weaker demand’
The comments followed Tuesday’s GlobalDairyTrade (GDT) auction at which the auction index fell by 5.0% to its lowest since September.
The drop also took to 23% the dip in the index from a March high, taking it through the 20%-decline mark which is typically used to define a bear market.
The decline comes amid waning expectations for demand, amid weakening forecasts for economic growth in countries including China, the top dairy importer, where a fresh uptick in Covid cases has provoked fresh lockdowns in some areas.
“The consumption outlook has softened somewhat,” Mr Keall said.
Westpac senior agri economist Nathan Penny said that the “recent weakness in the Chinese economy is a likely catalyst for weaker global dairy demand”, noting that the country reported GDP growth of a “miserly” 0.4% year on year for the April-to-June quarter.
Extra milk powder
He was downbeat too in interpreting increases by Fonterra, which sells most of the product sold through GDT, to volumes of both skim and whole milk powder it would be marketing through the auctions.
“This move suggests that previously contracted sales have now fallen through as buyers have either been able to point to lower prices elsewhere (ie in the US and/or the EU) or simply that they don’t have the consumer demand to justify the earlier sales contracts,” Mr Penny said.
“That’s seen product pushed back into the market place.”
Nonetheless, Mr Penny offered some cause for optimism, saying that “we expect the Chinese economy to rebound over the remainder of 2022 as Covid restrictions ease and economic stimulus takes hold”.
Westpac forecast expansion of 5% in China’s economy this year, spurring “a recovery in consumer spending and thus dairy demand over the coming months”.
ASB’s Nathaniel Keall highlighted “extremely tight… [global] supply fundamentals”, noting in particular declining year-on-year milk output in the European Union in March, April and May, seasonally high production months.
“The ongoing energy crisis, drought, rising input costs and other unfavourable on-farm economic headwinds [are] weighing,” he said.
“The poor first half of the year in the EU means there is 325,000 tonnes less milk floating about from the world’s largest exporter.”
SMP vs WMP
At Tuesday’s GDT, prices of whole milk powder, which accounts for the majority of volume traded, fell by 5.1% to a nine-month low of $3,757 a tonne, and took to 21% their decline from their March high.
However, skim milk powder fared worse, dropping 8.6% to $3,709 a tonne, to lose its unusual premium over whole milk powder.
Skim milk powder – from which fat has been removed to make butter, for example – had traded at a premium for the previous seven auctions, stretching back to April, in a move attributed to curtailed output in the EU, the top exporter of the product.
The skim milk powder premium reached as much as $214 a tonne in May, the highest at GDT in seven years.
The trailing five-year average is for a whole milk powder premium of $566 a tonne, on GrainPriceNews calculations.