When will global milk production hit a tipping point?
With global milk prices falling, the question is when will key exporting countries reach a tipping point where production starts to dip.
Last week’s Global Dairy Trade (GDT) auction saw the price index rise 0.1%, a slightly better outcome than expected by markets. This followed a 1% rise in the previous auction. Whole milk powder price rose 2.1% with increased demand from China.
At last week’s auction, whole milk powder fetched US$2,761/MT – still 5% below the year’s peak in January and 9% below the average of the past three years ($3,040).
While analysts believe these are early days, the positive GDT result signals that the worst may be over for some key markets.
However, Northern Hemisphere production and a high NZ dollar could affect the milk payout for NZ farmers.
Westpac’s senior market strategist Imre Speizer says it’s hard to infer too much from just one auction.
He says the result is consistent with the rebound in economic activity seen in many countries since the contraction in April.
“Activity levels remain extremely weak, but possibly past the worst,” he says.
Westpac is forecasting a 2020-21 farmgate milk price of $6.30/kgMS.
Speizer notes that the futures market is broadly in agreement, pricing it at $6.20/kgMS currently, slightly more upbeat than the $6.13 two weeks ago and $5.93/kgMS at the end of April.
Last month Fonterra announced an opening forecast range of $5.40-$6.90/kgMS.
ASB is more optimistic and has an opening forecast of $6.50/kgMS. Senior economist Chris Tennent-Brown notes that this is towards the top end of Fonterra’s range.
While any lift in whole milk powder prices is encouraging, over recent weeks the stronger NZ dollar is an offsetting negative, he says.
It was noteworthy that North Asian share (a proxy for China demand) rebounded at last week’s auction to a level slightly above average for the past 12 months.
RaboResearch dairy analyst Tom Bailey notes that conditions in China generally continue to improve economically, which typically leads to increased demand for dairy.
However, Rabobank estimates that significant domestic stockpiles of milk powder remain in China due to spray drying in February, resulting from supply chain constraints in processing fresh dairy products at the time.
Bailey says these stocks will likely pose a demand risk for imported powders later in the year.
He also noted that demand for whole milk powder was up as markets reopen and supply chains are refilled.
However, while distributors might be refilling their pipelines, true consumer-level demand remains opaque around the globe.
