Westpac acknowledged “upside risks” for its benchmark milk price forecast after dairy values extended their recovery at GlobalDairyTrade, putting in their first back-to-back rises in six months.
Dairy prices, as measured by the GlobalDairyTrade (GDT) index, gained 1.9% at Tuesday’s auction to take to 7.0% their recovery from a mid-August low, and indeed reach their highest level in two months.
Terming the result “solid”, Westpac said that it “firms up” the bank’s forecast for milk prices, as measured by farmgate values for New Zealand producers, to come in at NZ$9.25 per kilogramme of milk solids for 2022-23, as started in June.
“That coupled with the deteriorating New Zealand production outlook, and the very supportive level of the New Zealand dollar, does bring some upside risks to our forecast into play,” Westpac senior agri economist Nathan Penny said.
‘Very weak supply’
A month ago, as prices touched the lowest since January last year, the bank flagged “downside risks” to its price forecast, although flagged the potential for recovery spurred by weak milk production rates in major exporting countries.
The bank overnight noted that Tuesday’s GDT gain “comes against a backdrop of very weak global dairy supply”, undermined by countries including key exporter New Zealand, where milk production fell by 5.5% year on year in July and is believed to have continued to lag.
“Anecdotally, production has continued on this weak note over August and into September,” Mr Penny said, viewing “clear downside risks” to the bank’s forecast of a gain in New Zealand volumes this year.
Auckland-based dairy giant Fonterra two weeks ago, citing unduly wet conditions, cut by 15m kilogrammes of milk solids to 1,495m kilogrammes of milk solids its forecast for its collections this season, although this would still represent a 1.2% increase year on year.
The US Department of Agriculture said earlier this week that “from weather to labour issues and feed costs, a number of adverse conditions are making it difficult for the country to reach its milk production goals”.
‘Weak supply and weak demand’
The USDA also reported a “somewhat” downbeat industry view on milk production in South America, where “although feed prices have stabilised, machinery, upkeep, hauling/fuel and labour costs continue to hamper production at the farm level”.
And in Europe, which is heading towards its seasonal production lowpoint, “the summertime heat and drought have eased, but milk production is still weak and milk components are low.
The USDA singled out the UK, where “industry sources also say that milk production is decreasing”, with reports of a 1.4% year-on-year decline in August deliveries.
“Industry analysts suggest that the milk herd continues to contract.”
The European industry “is trying to work through the uncertainty of a market driven by weak supply and weak demand”, with higher prices keeping consumption in check.
Fats in demand
At Tuesday’s GDT, anhydrous milk fat proved the best performers, rising by 4.0%, after Fonterra, which provides the bulk of product sold through the event, cut its offering over the next 12 months.
Whole milk powder, which retains its fat, outperformed too in adding 3.7% to $3,733 per tonne, to take to 9.2% its recovery over September’s two auctions.
However, skim milk powder eased by 0.7% to $3,547 per tonne, expanding its discount to whole milk powder to a six-month high of $186 per tonne, although a gap well below the trailing five-year average of $536 per tonne.