2016 price gains largely holding

In his BNZ Rural Wrap, Steel notes international dairy prices rose strongly in 2016 from low levels and these gains have largely held this year.

“While there has been a hint of a pullback over recent months with the Global Dairy Trade price index falling in four of the past five auctions, the cumulative decline over that period has only been 3% -- a tiny move in the context of price swings over recent years,” Steel says.

The minimal moves this year suggest reasonable market balance, although the headline changes mask material differences in individual segments. Milkfat prices have lifted strongly in 2017 and cheese prices are mildly higher. Meanwhile milk powder prices are lower than at the end of last year.

But Steel notes that overall, despite easing slightly over recent months, dairy prices have generally been holding up well.

Some supporting factors this year have been:

- EU milk supply has disappointed after showing earlier signs of increasing. Poor weather (too hot and dry) has seen latest figures dip in production on a seasonally adjusted basis.

- US milk supply has not increased as much as the USDA expected in 2017, despite more cows. While US milk production is now expected to be up 1.6% in 2017, it is less than the 2.4% expansion expected earlier in the year.

- Very strong milkfat markets as strong demand (much of it seemingly structural) faces limited supply. International butter prices have essentially doubled over the past 12 months.

- Buoyant Chinese import demand with year-to-date gains in many major product categories.

- A stronger Euro, at least 12% higher against the US dollar this year, making European product less competitive on the world market.

- A softer USD, about 9% lower this year on a trade weighted basis. This tends to lift prices quoted in US dollars, like dairy products.

- A difficult winter in NZ and recent dry conditions in parts of Australia may raise questions about how much southern hemisphere supply can rise in the new season.

Steel says given all the above it is perhaps surprising that dairy prices haven’t pushed a bit higher.

“They could yet do so.”

$7/kgMS in sight?

BNZ has lifted its forecast 2017-18 season milk price to $6.75/kgMS, matching Fonterra’s latest forecast.

“We think this sits closer to the current mid-point of a still wide range of possible outcomes,” says Doug Steel.

“If current international dairy price and currency levels were to persist through the remainder of the season, our calculations indicate that this would result in a milk price close to $7/kgMS.

“Dairy prices could yet push higher. It wouldn’t take too much to see milk price forecasts nudge up to $7 or more.

BNZ’s central forecast is underpinned by wholemilk powder (WMP) prices drifting down toward US$3000/tonne (now about US $3150/t) over the coming nine months or so.

A downside scenario might see WMP fall back to about US$2600/t by season’s end. This could involve a blend of a strong lift in global milk supply, a pullback in the EUR, slower-than-expected global economic growth perhaps stemming from policy-induced trade disruption, an economic stumble in China denting dairy demand, a retreat in oil prices and/or even weaker international grain pricing.

Even with a lower NZD under these conditions, it would suggest a 2017-18 milk price in a range of $5.90 to $6.30/kgMS.

An upside scenario might see WMP push up toward last December’s peak of about US$3600/t by season’s end.

“Such a situation could stem from some combination of pullback in EU milk supply, a lack of lift in NZ production, ramping up of Chinese demand, a jump in international oil and/or grain prices, or perhaps a weather event in a major milk producing area. The NZD could lift in such a scenario, but even so, and given other uncertainties, we estimate this would give a 2017-18 milk price in a range of $7.20 to $7.60/kgMS,” says Steel.