Milk Glut Drags Fonterra Forecast Down to $9.20/kgMS
A milk glut around the world shows no sign of easing, putting downward pressure on farmgate milk prices for the next few months.
The last Global Dairy Trade (GDT) auction of the season failed to deliver any big increases. Despite market expectations, overall prices fell 0.9% last week while whole milk powder prices, which dictate the farmgate milk price paid by Fonterra, rose 0.3%.
Westpac senior agri economist Nathan Penny says the result was in line with expectations.
"We had pencilled in flat WMP prices. However, the result was below market expectations, with future pricing pointing to a circa 2% rise prior to the auction," he told Rural News.
"Coming late in the season, the result also doesn't change the outlook for this season's milk price. Thus, we reaffirm our milk price forecast of $8.30/kgMS."
ASB economist Nat Keall agrees the dairy prices have underperformed at the lastest auction. He says broader demand and supply dynamics in global dairy markets appear relatively little changed.
ASB is also sticking to an $8.30/kgMS forecast for the current season. Fonterra has a range of $8.20 to $8.80.
While the economists agree on the current season, their opening forecast for the new season is poles apart: Westpac is forecasting $10/kgMS and ASB $7/kgMS.
Penny expects the Chinese economy will gain momentum over the course of the year and improved Chinese demand will lift global dairy prices. Very subdued global milk supply will provide additional support for prices.
He predicts NZ milk production to remain weak.
"First up, we expect cow numbers to continue to decline.
"In addition, we expect the squeeze on farm profits will crimp production as farmers look for savings where possible, including on things such as fertiliser, farm maintenance and animal health."
Keall, however, expects global milk supply to improve over the next 12 months.
"European milk production continues to make year-on-year gains as we enter the Southern Hemisphere lowpoint.
"NZ milk production will lift off its lows over the season as some input costs ease, though we don't expect NZ milk production to return to the peaks it reached in 2020/21."
On the demand side, Keall anticipates a relatively subdued outlook over the course of the season.
"We remain cautious about the outlook for Chinese demand. With local WMP production strong and inventories coming off recent highs, China has only partially returned to the auction party, taking only about half the WMP on offer."
Keall adds that with this season very nearly over, the focus remains on what kind of milk price farmers can expect in 2023/24.
"There's a wide range of forecasts among prognosticators, reflecting how far away we are from the end of the season."
The sector will eagerly await Fonterra's guidance this week.
