Trade balance with the US a saving grace
New Zealand is so far escaping the unpredictable vagaries of President Donald Trump's trade policies by the skin of its teeth.
However, RaboResearch senior dairy analyst Emma Higgins says its forecast remains towards the lower end of Fonterra’s forecast range of $5.90 to $6.90/kgMS as uncertainty looms large on the global market.
Covid-19 has brought significant disruption to global dairy markets but dairy commodity prices have been resilient and rallied in quarter two on the back of government support, in the form of government purchases, inventory management and fiscal stimulus for consumers.
Despite this, Higgins said global market fundamentals are expected to remain weak into the first half of next year, with consumption taking time to recover and milk production forecast to grow over the next 12 months.
“Food service revenues are improving, but they remain well back on pre-Covid levels and it will take time for this sector to make a full recovery, even for those countries that have been well ahead of the curve.
“We are also seeing early signs of retail dairy sales decelerating. Ultimately, year-on-year dairy demand growth is unlikely to be in sight for the key dairy-export regions until quarter one 2021,” she said.
The potential removal of government support programmes is another reason the bank is taking a cautious view towards the global dairy market recovery.
“These programmes have contributed significantly to improved dairy commodity prices over recent months, however, the outlook for these is much less certain as we move into the final quarter of the year.”
Higgins said uncertainty over Chinese demand and an anticipated lift in global dairy production were additional reasons for caution.
“Chinese dairy import behaviour over the next six to nine months presents uncertainties. So far Chinese dairy consumption has recovered better than expected, but China’s strengthening domestic production and possible shift in stocking strategy raises questions over its import requirement into 2021,” she said.
“We also expect to see global dairy supply across the big seven dairy exporters – US, Uruguay, Brazil, Argentina, EU, Australia and New Zealand – to continue to increase over the course of this year and into the first half of next.”
Fonterra this month reaffirmed its wide forecast range with co-op chairman John Monaghan noting that the impact of Covid-19 is still playing out globally.
Monaghan says from a milk price perspective, the supply and demand picture remains finely balanced.
“There continues to be significant uncertainties – including how the global recession and new waves of Covid-19 will impact demand globally, and what will happen to the price relativities between the products that determine our milk price and the rest of our product range.
“As a result of these uncertainties and given that financial year has just begun, we are giving a forecast earnings range wider than we usually would.”
