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Fonterra expects demand from China to rise as the country recovers from Covid-19.
Reduced short-term demand from China is impacting farmgate milk price, says Fonterra.
Last week, the co-perative reduced its price range for the 2022-23 season, which ends May 31. The forecast range narrowed from $8 to $8.60/kgMS to $8.10 - $8.30/kgMS with a 10c drop in the midpoint to $8.20/kgMS.
For the new season, Fonterra has announced an opening forecast farmgate milk price of $7.25 to $8.75/kgMS, with a midpoint of $8/kgMS.
Fonterra chief executive Miles Hurrell says the reduced short-term demand, particularly from China, has had an impact.
"We're well through the season now, with almost all of our milk contracted, giving us more certainty on where we'll end the season," says Hurrell.
"Global Dairy Trade prices have not recovered to the levels required to hold the previous midpoint for this season."
Hurrell expects that China's demand for whole milk powder will lift over the medium-term.
"We expect demand to gradually strengthen over the course of FY24 as China's economy continues to recover from Covid-19.
"However, the timing and extent of this remains uncertain, with China's in-market whole milk powder stocks estimated to be above normal levels following increased domestic production and this is reflected in our opening forecast range for the season."
Farmers are under pressure due to rising input costs and interest rates.
Hurrell says Fonterra is aware of this and has designed a new advance rate guidance to get cash to farmers earlier in the season.
"Our strong balance sheet allows us to make these changes and we will be using this new Advance Rate guideline going forward, starting with the season about to commence," says Hurrell.
Rabobank's senior agricultural analyst Emma Higgins is also forecasting $8.20/kgMS milk price for the new season.
Higgins notes that global milk supply is returning to growth in key production regions and Chinese dairy demand is expected to remain subdued until the latter part of the year.
She says global dairy markets look completely different than they did 12 months ago.
"At this stage last year, market fundamentals were very tight with limited supplies in export regions, aggressive import demand by Chinese buyers and supply chain issues exacerbating buyers' urgency to procure raw materials," she says.
"Since then, we've seen a return to growth in milk supply across most of the export regions, sluggish Chinese import volumes as the country rebalances its internal market, and widespread demand rationing in many other dairy markets across retail, foodservice and ingredient channels in response to food price inflation and higher sticker prices."
As a result, dairy commodity prices for whole milk powder (WMP) and skim milk powder (SMP) have fallen between 30% and 40% since peak commodity prices in 2022 and are now at, or below, the average price over the previous five years.
Higgins says farmgate milk prices are feeling the pressure in most export regions.
"Milk prices in export regions have followed the commodity cycle, none more so than in the dairy sector, which is often the first mover in price cycles," she says.
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