Dairy prices defy ample supply as market momentum builds
Global dairy prices continue to rise despite ample supply from key milk producing countries including New Zealand.
The price of whole milk powder (WMP), which Fonterra uses as the benchmark to set its farmgate milk price, rose a solid 3.2% to US$3,329/ metric tonne.
While still way off the US$4,757/MT mark reached one year ago, stronger demand in China for dairy products is a good omen for the coming months.
Westpac senior agri economist Nathan Penny says the likely catalyst for the price rise is rebounding Chinese demand.
“This rebound stems from the lifting of China’s Covid Zero policy,” he says.
“With Chinese consumers now largely free to move about and return to restaurants, cafes and bakeries, we anticipated that products like butter would benefit most from looser Covid restrictions.”
Butter, a key ingredient in food service products, posted the largest price rise.
Penny says over the coming months, he expects prices to gain further momentum as Chinese demand continues to rebound.
“For example, we forecast the Chinese economy to grow by 6% over calendar 2023 from 3.5% in 2022 and for strengthening household spending to be a key driver of economic growth over the year.”
Despite the price rebound, it’s still too early to see a shift in the forecast milk price.
Penny says the price rise in last week’s GDT is consistent with their 2022/23 milk price forecast of $8.75/kgMS.
ANZ has meanwhile slashed its forecast milk price for the season by 25c to $8.50/kgMS; the lower end of Fonterra’s latest price guidance of $8.50 to $9.50/kgMS.
The bank’s agriculture economist Susan Kilsby notes that dairy prices have been quite weak this summer, compared to recent years.
But she expects prices will steadily improve from here.
Last week’s positive GDT result “will help to instil some confidence in the market”.
“We are forecasting a modest improvement in dairy prices across the remainder of the 2022-23 season,” she says.
While demand from China may be improving, a big domestic WMP stockpile may stand in the way of global price rises.
“WMP prices are highly dependent on demand from China. While demand from the Chinese market appears to be improving, it does not appear that this market is short of stock at present.”
The strengthening New Zealand dollar will also have a say on future dairy prices.
Kilsby also notes that exchange rates have been largely unfavourable for farmgate prices.
“While we expect dairy commodity prices to gradually recover, we also expect the NZD to appreciate further.”
