Prices will stabilise, won't crash - OCD

However, Open Country Dairy chief executive Steve Koekemoer doesn’t expect prices to crash like they did following an $8-plus payout in the 2013-14 season.

Koekemoer described the last Global Dairy Trade (GDT) result as “a cracker”. The GDT price index rose 15% and whole milk powder prices jumped a whopping 21% to US$4364/metric tonne.

“I was certainly expecting an increase but not to that magnitude,” he told farmer suppliers.

“No doubt there were a few alarmed punters wondering what happened, now dissecting their forecasts, trying to understand the driver behind the massive jump.

“Although we shouldn’t get hung up on a single auction result, it does cement confidence in the short term.”

China buyers were driving the demand. With New Zealand now heading into the tail end of the season, supply will continue to tighten and should keep pricing firm.

But Koekemoer isn’t expecting prices to remain at these elevated levels.

“I would like to caution the optimists who believe the current high pricing will remain the norm as we will see a correction at some point.

“Continued high prices will eventually burn off some demand causing pricing to return to the longer-term averages.”

 On the other hand, he doesn’t see any significant downside over the medium term.

“Some are referring to the crash from the 2014/15 and 2015/16 seasons following the last record $8.40 milk price.

“We need to remember that this coincided with EU quotas being removed and Europe significantly ramping up production.

“This is not the case today as EU growth is slow. Demand should remain in balance with the supply coming online and if anything, provide for another stable season next year.”

OCD finalised its January settlement, paying farmer suppliers $7.57/kgMS for milk picked up in December and January. The company had a forecast range of $7.30 to $7.50/kgMS for the period.

Koekemoer says he’s pleased that OCD exceeded the top end of its forecast range.

It has also increased its upcoming forecast periods: milk supplied between February and May has a forecast range of $7.30 to $7.60. The forecast range for June to September supply this year drops slightly to $6.90 to $7.20 range.

Koekemoer says the road ahead looks good for dairy and OCD expects to deliver another strong result at the next settlement period.

Westpac senior agri analyst Nathan Penny believes dairy prices will stabilise later this year.

He says the last big lift in GDT prices has a New Zealand angle to it.

New Zealand is the largest exporter of both WMP and milk fats. Skim milk powder prices, in contrast, which the EU and US also heavily export, have increased by a more modest 22% since November.

Penny says the implication is that this latest increase will prove temporary.

“New Zealand has entered its autumn and the season is winding down.

“Markets know that New Zealand supply will not be able to catch up to surging demand until the spring, so prices are rising right now.

“But equally, once spring does arrive we expect key WMP (and milk fat) prices to start moderating as New Zealand production starts its spring flush.”

But Penny expects one driver of the recent strength will prove longer-lasting.

“As we have noted over recent months, Chinese and more recently South-East Asian demand is underpinning the price strength and we expect this to be ongoing through 2021.

“That said, global dairy supply will eventually respond. The impact of this response will come to bear from around midyear, with prices beginning to moderate at this time.”