Wednesday, 16 June 2021 08:55

Wide price range 'realistic'

Written by  Sudesh Kissun
BNZ senior economist Doug Steel says there are risks on both the up and down sides - evidenced by Fonterra's wide $1.50 forecast range. BNZ senior economist Doug Steel says there are risks on both the up and down sides - evidenced by Fonterra's wide $1.50 forecast range.

Fonterra's wide forecast milk price range for the new season is realistic, says BNZ senior economist Doug Steel.

The co-operative's $8/kgMS midpoint is the highest opening forecast milk price on record. The previous highest opening forecast was $7/kgMS on three separate occasions.

Last month, Fonterra announced its opening 2021-22 milk price forecast of $7.25 to $8.75. Synlait has come out with an $8 opening milk price.

Steel says the midpoint seems consistent with product prices falling from current levels but remaining elevated relative to long term averages through the season.

"This is a similar profile to what we have built into our 2021-22 milk price forecast of $7.80," he told Rural News.

"While the 20c difference to Fonterra's range mid-point is meaningful in absolute terms, we wouldn't split hairs at this stage of the season.

"There is a long way to go. Anything around these levels would be positive."

However, Steel points out that there are palpable risks on both sides - evidenced by Fonterra's wide $1.50 forecast range.

There is the possibility that global dairy prices may hold up better than expected as high international grain prices lift costs for NZ's northern hemisphere competitors.

He points out that US corn prices have more than doubled over the past 12 months. Such things make an aggressive global milk supply response to current higher dairy prices less likely.

"Indeed, the current milk-price-to-feed ratio in the US suggests milk production growth there is more likely to slow into year's end rather than lift," says Steel.

Other positives stem from the possibility that world growth proves even stronger than expected, as the vaccine rollout allows more reopening.

"On our calculations, if product prices and the NZ dollar remain around current levels for the entire season ahead it would see milk prices test the top end of Fonterra's price range."

But there are downside risks too and much hinges on Chinese demand.

According to Steel, strong Chinese demand is not assured.

"And there is a chance that as inflation picks up globally, central banks start thinking some of it will be persistent, such that they change their tune and start talk more about removing monetary stimulus.

"That could quickly take the edge off what has been a very strong run up in commodity prices."

Also, Covid hasn't gone away.

Steel says what matters most is what happens next - so all eyes back on coming Global Dairy Trade (GDT) auctions and the NZ dollar.

He says the small GDT price dip earlier this month is of little consequence for the season ahead.

More like this

Cynical politics

OPINION: There is zero chance that someone who joined Fonterra as a lobbyist, then served as a general manager of Fonterra's nutrient management programme, and sat on the board of Export NZ, a division of lobbyist group Business New Zealand, doesn't understand that local butter (and milk and cheese) prices are set by the international commodity price.

Why is butter so expensive in New Zealand? Fonterra explains

Kiwis love their butter, and that's great because New Zealand produces some of the best butter in the world. But when the price of butter goes up, it's tough for some, particularly when many other grocery staples have also gone up and the heat goes on co-operative Fonterra, the country's main butter maker. Here the co-op explains why butter prices are so high right now.

Featured

T&G Global returns to profitability

Fresh produce grower and exporter T&G Global has overturned last year’s dismal performance by reporting a half year net profit of $1.7 million.

Rural backlash over plan to cut police staffing

Federated Farmers North Canterbury president Bex Green says two public meetings held this week should have made it loud and clear that rural families and businesses are concerned about proposed staffing changes at NZ Police.

DairyNZ thanks farm staff

August 6 marks Farm Worker Appreciation Day, a moment to recognise the dedication and hard mahi of dairy farm workers across Aotearoa - and DairyNZ is taking the opportunity to celebrate the skilled teams working on its two research farms.

Editorial: Getting RMA settings right

OPINION: The Government has been seeking industry feedback on its proposed amendments to a range of Resource Management Act (RMA) national direction instruments.

National

Machinery & Products

» Latest Print Issues Online

The Hound

Trop de Paris!

OPINION: Your old mate's ear has been chewed off recently by farmers voicing their displeasure with the National Party, particularly…

NZ vs Aussie beef

OPINION: Your old mate hears that at a recent China Business Summit, PM Christopher Luxon delivered a none-too-subtle "could try…

» Connect with Rural News

» eNewsletter

Subscribe to our weekly newsletter