Are we heading towards $7?

With farmers struggling under rising interest rates and farm input prices, the latest auction results provide little comfort behind the farm gate.

Fonterra’s current range of $7.25/ kg to $8.75/kgMS is almost certain to be lowered at its next forecast milk price review. ASB is warning that a milk price around $7/kgMS could be a possibility.

Whole milk powder prices – by far the most important component in the milk price calculation – tumbled a whopping 7.9% last week.

ASB economist Nat Keall says that takes WMP prices to their lowest level since early 2019 and represents their largest single auction fall since early 2017.

“WMP offer volumes were higher this auction, but the scale of easing was still well in excess of the circa 3% fall the futures market had flagged,” he says.

ASB is sticking to its forecast of $7.25/kgMS for this season.

Keall notes that most forecasters and the futures market have lowered their milk price expectations over recent weeks and months as demand has flagged.

“But given our below-consensus forecast, the threshold for us to lower our own forecast hasn’t yet been reached,” he says.

The NZ dollar has also underperformed our expectations, providing a bit of an offset, notes Keall.

“In any event, Fonterra’s guidance range has looked too strong in our view for some time, and we expect both the upper and lower end of the range to be lowered over the coming weeks – perhaps to $6.75-8.25/kgMS or so.

“Not long ago, market expectations were wildly north of our forecast for the season but are now a lot closer – currently trading around $7.35/kgMS.

“There is less to be gained from hedging or taking advantage of Fonterra’s fixed price offering at these levels than when the contract was trading north of $8 only a month or so ago.

“Nonetheless, it is entirely conceivable this season’s milk price could wind up nearer the $7 per kgMS and hedging or locking in some output at these levels may still be attractive for some.”

Westpac senior agri economist Nathan Penny says at this point of the dairy price cycle, they had expected prices to continue to fall in the short term.

“Recall that global demand is weak, notably from our key market in China,” notes Penny.

“Indeed, when we recently revised our 2023/24 milk price down to $7.80/kg, we had factored in further price falls over August and September – with expectations for a stabilisation and recovery later in the season.

“That said, the fall last week was larger than we had expected. And while it is difficult to read too much into one auction result, it does point to prices potentially falling by more than our updated forecast suggests.

“With that in mind, we continue to note that it’s still early days in the season and a wide range of milk prices are possible.”

There was a silver lining to last week’s auction: China took a little bit more product this time around.

But Keall says not in a way that should give farmers much comfort.

About 47% of the WMP sold was bought by ‘North Asia,’ this auction, versus 27% a fortnight ago, the highest proportion since May.

“But that increase looks to be a function of bargain-taking and an absence of much competition from other regions, rather than a function of any recovery in underlying demand.

“And it’s still a lower portion than we would often expect from China at this time of year.”

Keall says not much has changed in terms of the demand and supply fundamentals.

“While this auction surprised to the downside, it is all a question of degree.

“Indeed, we’ve long highlighted our expectation that dairy prices faced further easing ahead given the continued underperformance of the Chinese economy, slower growth elsewhere, and the likelihood that global dairy supply is past its lows of recent years.

“While supply isn’t surging ahead everywhere, it looks to be sufficient to meet what subdued demand is out there.”