NZ remains lowest-cost milk producer - report
The cost of producing milk in New Zealand continues to compare favourably with other exporting regions despite a lift in production costs over the past five years.
Combined with a weakening New Zealand dollar, this means the impact of plummeting prices on the farmgate milk price is likely to be minimal.
Last week's Global Dairy Trade (GDT) auction saw prices for flagship whole milk powder drop 10 auctions in a row. Over that time, WMP prices have plunged 30%, while overall prices are down 27%.
Westpac senior agri economist Nathan Penny says the falls continue to highlight weakening global dairy demand.
He says Fonterra has increased the amount of product on offer on the auction platform, despite no real change in the level of its milk collections. "This move suggests that previously contracted sales have now fallen through as buyers have either been able to point to lower prices elsewhere (for instance, in the US or the EU) or simply that they don't have the consumer demand to justify the earlier sales contracts. "That's seen product pushed back into the marketplace."
However, at the same time, the global dairy production outlook is very weak.
Penny points out that in the three key dairy exporting regions - the EU, the US and New Zealand - 2022 dairy production is expected to fall compared to 2021.
"The fact that all three regions are likely to post production falls is rare.
"Costs of production have spiked and this has been compounded by poor weather (hot and dry in the Northern Hemisphere and now too wet in the Southern Hemisphere).
"All up, very weak global production should support global dairy prices over the season."
Another positive is the expected rebound in the Chinese economy as Covid restrictions ease and economic stimulus takes hold.
"Indeed, Chinese consumer spending growth is already on a firm footing, and as that continues to strengthen, we expect that it will lead to a recovery in dairy demand over the coming months," notes Penny.
Westpac is sticking to its forecast milk price of $9.25/kgMS. While there are downward risks to the forecast, the added support of a weak NZD/USD means Penny still expects a healthy milk price this season.
Despite the plunging dairy prices, ASB is sticking with its ambitious $10/kgMS forecast milk price for the season.
However, ASB economic and research team member Chandna Bedi concedes that the $10 milk price for next season hinges on stronger prices over the spring and summer months.
"And we will need signs of improvement at coming auctions to support this forecast.
"But on a more encouraging note, prices are still historically high, and a milk price within Fonterra's appropriately wide (but high) forecast range for next season is very achievable."
Bedi also points out that we are in the middle of winter and have not panicked about the recent run of soft prices.
"Prices eased over winter last season as well and then moved higher given the extremely tight global milk supply.
"And we continue to think global dairy demand is likely to remain relatively inelastic, and keep prices well supported.
"Likewise, we think global dairy supply will remain extremely constrained," says Bedi.
