Fonterra dairy farmers with a sense of recent history will know that what goes up will inevitably come back down when it comes to the milk price forecast.
At $7.30-$790/kg MS with a mid-point range of $7.60/kg MS reaffirmed at the co-operative’s interim result announcement, the big question now is how far could it fall in the second half of the year?
By all accounts, it should be a reasonably soft landing and there certainly does not appear to be a return to the past where the milk price climbed to $8.65 in early 2014, only to steadily fall to $3.85 in August 2015.
Farmers would have been quietly pleased with the numbers that chief executive Miles Hurrell and chief financial officer Marc Rivers outlined on March 17.
Hurrell warned that he expected the co-operative’s earnings to come under significant pressure in the second half as high milk prices push up input costs.
This will be coupled with Northern Hemisphere dairy producers coming into its peak milk period.
ASB’s Commodities Weekly publication says that aggressive Chinese purchases were continuing to fuel the strength in prices, with much of the buying as a result of covid-induced food security fears.
The auction in early March, where prices spiked 15%, was on the back of shipping disruption fears, which saw buyers rush to secure product, bidding up prices in the process.
It has its new season milk price at $7.30/kg MS.
The bank, however, remained cautious.
“At a certain point, there remains the risk that China will have built sufficient stockpiles and start to take its foot off the accelerator. The timing of such a move remains highly uncertain, and the re-entry of other buyers into the market may help offset the price impact,” it says in its report.
Rabobank senior dairy analyst Emma Higgins says the global supply and demand dynamics still meant a strong milk price forecast, despite the recent 3.8% fall at the GDT.
“Obviously, Chinese import demand is a key watching factor for New Zealand farm gate milk prices,” Higgins says.
“At a broad level, we think that the expensive cost of producing milk (and WMP) in China, overlaid with the complexity of global shipping disruptions, alongside modest global milk production growth lends itself to elevated WMP prices over the coming months.”
Westpac economist Nathan Penny pointed out that WMP prices jumped 13.5% during March, while overall prices lifted 10.7%. And since the start of the year, WMP and overall prices have posted gains of 25% or better.
He says the latest result has done little to change the overall dairy market, with the high prices a function of demand outstripping supply.
“Also, global supply chain disruptions and the approaching seasonal lull in NZ production continue to add to the upward price pressure,” Penny says.
He expected prices to remain where they are, although he expected some volatility. Closer to spring he expected global dairy prices to gradually moderate as production started up again.
“However, with the global supply response likely to be moderate and ongoing solid global demand, we expect global dairy prices to remain firm over the 2021-22 season as a whole,” he says.
It had Fonterra’s forecast pegged at $7.25/kg MS.
There are, however, two points worth noting. Firstly, Fonterra’s recent history of posting conservative opening forecasts for the new season, which came after facing the ire of farmers for having a high opening price and then having to downgrade it later in spring and summer.
The second factor is on-farm input prices. Obviously, this doesn’t affect the milk price but does it affect farm net incomes and inputs – fertiliser, rates, wages and palm kernel have all jumped over the past season.
What effect this has had on this season will become clearer in July-August and by then, it will also provide a clearer direction on its impact for 2021-22.