Milk Powder Prices Prop Up Farmgate Milk Price
Milk powder prices are keeping farmgate prices up, helping processors offset the dip in milk fat prices.
While Fonterra's forecast mid-point olf $9.75/kgMS signals a strong start, ANZ is forecasting $9.20/kgMS.
Dilly says they expect downward pressure on dairy prices and upward pressure on the NZ dollar as the season progresses.
Downside risks include a global economic downturn, which would decrease dairy demand.
Global Economic Slowdown Remains a Key Risk
Dilly says that if the Middle East conflict gets resolved, lower oil prices may put downward pressure on dairy and many other commodities as oil and gas exports return to normal.
"It would also likely push the NZ dollar higher, hurting farmgate returns demominated in NZ dollar."
There are also upside risks including an emerging El Nino, which usually leads to poor milk production in the Southern Hemisphere.
The ongoing Middle East conflict also has the potential to lead all commodity prices sharply higher, including dairy.
Dilly says dairy prices are often correlated with crude oil and other commodities.
Profit Margins Could Remain Tight
"In addition, food producers globally are facing higher fertiliser prices, which in the end will be passed onto consumers."
Dilly believes the cost of production for many farms this season will be different.
"The conflict in the Middle East has lifted costs for diesel, fertiliser, and most other petrochemical-derived farm inputs.
"While some prices have drifted lower since peaking at the height of the conflict, diesel retail prices are currently up 70% in New Zealand relative to pre-conflict levels.
"In addition, interest rates are higher as financial markets adjust to the prospect of higher inflation and wider risks to the global economy."
DairyNZ Raises Breakeven Milk Price
DairyNZ recently updated their breakeven milk price for 2026/27, revising it up from $8.36/kgMS to $8.79.
Dilly says that while their forecast is higher at $9.20/kgMS, this will still be uncomfortably close to breakeven for some farms.
"There is a wide range of uncertainty around any milk price forecast at this point in the calendar, and a wide range of cost structures across farms, so a milk price below breakeven for some is very possible.
"At any rate, narrower margins will put cost management into focus this season."
