Strong production, tested demand send milk prices crashing
Strong global milk production and rebalancing of demand among key buyers has delivered one of the biggest drops in whole milk powder prices in recent years.
BNZ has lifted its forecast 2021-22 milk price to $8.30/kgMS. Senior economist Doug Steel says the dynamics and balance of risks appear to be changing with robust demand bumping up against subdued supply.
"It is as much that GDT prices have stopped falling as it is that they have bounced a bit. Factoring all that in, we lift our 2021/22 milk price forecast to $8.30."
The benchmark wholemilk powder (WMP) prices ended a run of six consecutive drops on Global Dairy Trade (GDT) to rise 3.3% to US$3.961/metric tonne. The GDT price index rose 4%, adding to the tiny 0.3% gain at the previous auction that followed a run of eight consecutive declines before that. Prices are at a high level, up nearly a third on a year ago and 18% above their 5-year average.
Steel says the bounce in prices follows a general lift in global risk appetite over recent weeks helping underpin demand.
"The number of unsatisfied bidders was well above average overnight, suggesting a firm underbelly to demand and that the current price strength will have legs.
"Indeed, forward price curves show high price levels extending into next year."
ASB economist Nat Keall says WMP prices are looking strong and stable across the contract curve.
"WMP prices settleed a little north of the US$3,700 mark, below their levels at the beginning of winter, but ahead of the last couple of auctions," he notes.
The stability in prices suggests this auction's gains weren't just a near-term rush of post lockdown anxiety.
"It's a signal buyers expect dairy demand to remain solid and are keen to avoid missing out given the tighter WMP supply of late," says Keall.
ASB is holding at its $7.90/kgMS forecast for this season.
"While we caution against placing too much emphasis on the auction-to-auction churn, this event has a particular significance as the first auction of the spring and our first good signal on where the market lies in three weeks," he says.
Westpac is sticking with its forecase milk price of $7.75/kgMS. Senior agri economist Nathan Penny says it sees the global dairy market as being largely balanced at this point, with prices settling at a healthy level.
"At the same time, we continue to note that it's relatively early in the season and there remains a wide range of possible milk price outcomes on both sides of this figure."
Penny believes not too much should be read into WMP prices lifting 3.3%.
"The result snapped an extended period of WMP price weakness, with prices lifting for the first time since back in May. However, over that period WMP prices fell by around 14%, so the lift overnight reverses some but not all of that price weakness."
All Eyes On NZ
All eyes will be on New Zealand's peak production season, starting next month.
BNZ senior economist Doug Steel says, to date, conditions have been generally favourable for grass growth through large parts of the country.
"While this is encouraging, we do not anticipate much growth. If any, in NZ milk production for the season overall, given strong output last season and a recent trend of fewer cow numbers.
"Through the pandemic, dairy farming has been deemed an essential industry so has continued operating through the various lockdowns.
"That is not to say there have not been any challenges. For example, the closed border has made finding appropriate staff all that much more difficult.
"As ever, actual milk production for the season will be heavily dependent on the weather."
