China's absence failing to keep global dairy prices down

ASB analyst Nathaniel Keall says he's surprised at the resilience in dairy auction prices.

His comments came as the first dairy auctions of the calendar year have got off to a healthy start, with the overall GDT index lifting 2.2% last week after a 1.3% rise a fortnight ago.

Most dairy commodities have gained ground, with whole milk powder prices up a little over 4% over the last two auctions.

ASB has lifted its forecast milk price for the season by 50c to $7.85/kgMS.

Keall notes that dairy prices are at their highest levels in nearly twelve months heading towards the end of the season.

Prices for all WMP contracts are now US$100-250 per metric tonne above their long-run average, having spent most of the season at, or below, that benchmark, he says.

"We've been surprised by the resilience in dairy auction prices," says Keall.

"Dairy prices have outperformed where we'd expected them to be, based on (reasonably decent) global dairy product and the (comparatively soft) global economic backdrop, particularly among major dairy importers like China.

"We've long highlighted the relative absence of Chinese processors at this season's GDTs and expected that a more sustained uptick in demand from China would be necessary to push dairy prices higher.

“But dairy prices have continued to press higher, despite China only buying low volumes of product on offer – including its lowest proportion of WMP in around six months at this week’s auction.”

With so much of the season’s product already sold – around 65% based on previous shipment profiles – ASB’s 2023/24 farmgate milk price estimate has been “mechanically” pushed higher.

With Fonterra also largely hedged for the season, there’s also more certainty around what its effective exchange rate will be, Keall points out.

He believes dairy prices would need to undergo a meaningful correction in the next few auctions to produce a milk price at or below the midpoint of Fonterra’s forecast range around $7.50/kgMS.

“As a consequence, we’ve revised up our Fonterra farmgate milk price forecast for the season, adding 50c to around the $7.85/kgMS mark.

“That’s a lower price than farmers have gotten used to over the past couple of seasons, particularly after taking into account elevated farmgate expenses, but it’s better than the $7/kgMS we were forecasting at the beginning of the season.”

Keall notes that their forecast is a shade above current NZX milk price futures pricing.

He notes that there’s still a bit of uncertainty associated with the forecast, but farmers may want to consider their risk appetite and contemplate whether hedging some product would be prudent.