ASB economist Nat Keall says the global dairy market is well supplied in the near-term, ‘and it is difficult to see a catalyst for much strengthening in demand’.
Economists have been taking the scissors to their milk price forecasts after what one described as a “terrible” dairy auction in the early hours of Wednesday.
The latest GlobalDairyTrade auction saw overall prices slump 7.4%, while the key Whole Milk Powder (WMP) price fared even worse with a 10.9% plunge.
This came on top of what has been a series of weak auction results with overall prices now down nearly 20% since the start of this year and down by over 45% from the peak levels seen in early 2022.
The giant dairy co-operative (Fonterra) recently lopped, in effect, $1 per kilogram of milk solids off its forecast milk price for farmers this season – reducing the ‘midpoint’ price of its forecast to just $7kgMS. Fonterra forecast a range of $6.25 – $7.75 for the price.
It has been estimated in the marketplace that this cut represents a reduction in dairy industry revenue of around $2 billion. And that was all before what happened on Wednesday.
ASB economist Nat Keall (he described the overnight auction results as “terrible”) had for a long time the lowest milk price forecast for this season among major bank economists and he’s down there again now, having slashed his farmgate milk price forecast from $7.25 to $6.60. But close behind is BNZ senior economist Doug Steel, who has slashed his forecast from $7.60 to $6.70.
In a Dairy Update Keall says the latest dairy auction result means overall dairy prices are now at their lowest point since late 2018, while WMP prices are at their lowest point since this time in 2016.
“We’ve been among the most bearish forecasters this season, but dairy prices have fallen further and faster than even we had anticipated,” he said.
Keall noted that Chinese dairy demand “remains soft”. Purchases have ticked up a little over the last couple of auctions – perhaps a bit of bargain hunting – but ‘North Asia’ is still buying quantities well below historical averages.
“With the Chinese economy continuing to deteriorate – data yesterday saw big downside surprises in retail sales and industrial production – dairy consumption is unlikely to dramatically improve in the medium term,” he said.
“There is plenty of uncertainty at this stage in the season, and there are some upside risks as well as downside ones. Nonetheless, we think it is prudent for farmers to be budgeting on a milk price in the lower half of Fonterra’s present guidance range.”
Westpac senior agri economist Nathan Penny – who left his forecast unchanged at $7.50, but who has twice trimmed it very recently – said in a Westpac Dairy Update that when when the Westpac economists revised down their 2023/24 milk price forecast to $7.50/ kg last week, “we had expected prices to continue to fall in the short term. Recall that global demand is weak, notably from our key market in China”.
“However, the fall overnight was larger than we had expected. And while it is difficult to read too much into one auction result, it does point to prices potentially falling by more than our updated forecast suggests.”
BNZ’s Steel said in an Economy Watch note that “one small saving grace” is that the New Zealand dollar has pushed below US60c, at least taking the edge off the product price falls when expressed in local currency.
“We judge the GDT price index in NZ dollar terms fell 3.4% overnight and is down 20% on a year earlier. If the currency stays lower, it will help provide some support for milk prices this season and, more so, next season. But, to date, the NZD is not enough to offset the downward pressure on domestic milk price calculations from lower product prices.”
