Recently, global dairy prices hit a record high.
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Photo: RNZ / Vinay Ranchhod

Last week the average price at the fortnightly global dairy auction rose 5.1 percent to $US5065 ($NZ7370) a tonne, after rising 4.2 percent in the previous auction.

The Global Dairy Trade price index hit 1593, breaking the previous record of 1573 set in April 2013.

Prices for other products were up too – wholemilk powder, butter, skim milk powder, and cheddar cheese.

In late February, Fonterra lifted its forecast farmgate milk price for the current season to a record midpoint of $9.60 a kilogram of milk solids.

Back in January, Synlait Milk was forecasting a record payout to its suppliers – and expected prices to stay high for some time.

So why are prices so high and what does it mean for our farmers? RNZ is here to clear it up.

Why are prices so high?

In February, Fonterra chief executive Miles Hurrell said there were good levels of demand for dairy, while global milk supply growth continued to track below average.

Milk production in the EU and US continued to be impacted by the high cost of feed and that was not expected to change in the coming months, Hurrell said.

And in New Zealand, ongoing challenging weather conditions have continued to impact grass growing conditions.

Fonterra chief financial officer Mark Rivers told the Rural Roundup podcast the easiest way to think of it was that “demand has been pretty steady, so it’s not so much a demand-driven story … it’s really a supply-driven event”.

“Here in New Zealand it’s been fairly dry and collections [of milk solids] are looking to be, you know, a fair bit off compared to last season, so that’s one factor.

“The other, is globally we’ve seen supply being pretty limited in Europe for example, we’ve not seen a supply response up. We’ve not seen a massive supply response in North America either.

“It’s probably driven in part by grain prices being so high and that being a factor and then of course on top of all of this is the context of global pandemic, supply chain disruptions, customers really worried about being able to get a hold of what looks like limited supply.

“You’ve got the environmental pressures that are of course there that are limiting the ability to increase production, not only in New Zealand, but in places like Europe as well.”

The interesting bit will be seeing how much the issue will be limited to the near future before resolving itself, Rivers told Rural Roundup.

Fonterra says the reduction in supply reinforces its focus on ensuring its milk goes into the highest-value products.

How does the pricing work – what do farmers get back?

Fonterra collects about 80 percent of Aotearoa’s milk production.

Because of that, there’s no market price for milk that is independent of the price paid by Fonterra, it says.

“As a result, since its formation in 2001, Fonterra has calculated a farmgate milk price that enables total returns to be allocated between payments for milk and returns on the capital invested by Fonterra farmer shareholders and by unit holders in the Fonterra Shareholders’ Fund,” Rivers said.

The Fonterra Board sets the total amount to be paid by Fonterra for all milk supplied to it in New Zealand in each season.

“Global dairy prices are a strong factor in determining: (a) Farmgate milk price – which is the amount farmers receive for their milk; and (b) the wholesale price of milk – which is the price dairy companies in New Zealand, including Fonterra Brands New Zealand (FBNZ), pay for the milk they make into consumer products such as fresh milk, cheese and yoghurt.”

You can find out more about how that works and is regulated here.

How long will this last?

Rabobank puts it pretty simply in a statement titled “Dairy prices expected to remain elevated in the near term, but longer-term outlook less certain”.

Rabobank senior agricultural analyst Emma Higgins says looking towards the 2022/23 season, pricing is much less certain.

It hinges upon consumer behaviour and normalised market conditions – both of which are very unpredictable within a setting of the escalating Russia-Ukraine conflict, she says.

However, that invasion has played a part in lifting dairy prices as global food security concerns increase. They’re expected to stick around in coming months.

“We expect global dairy commodities to stay elevated through to the middle of the year amid the constrained global supply. But with inflationary pressure running rampant around the world, and expectations for global economic growth beginning to slow, this begs the question ‘how high will dairy prices go and for how long will they stay there?’.

“High-priced dairy commodities could take a bite out of some importers’ appetites, but on the flip side, we have seen rising oil prices support Whole Milk Powder (WMP) prices in the past.”

However, the situation is evolving rapidly, Higgins says.

If, for example, China supported Russia and exposed itself to sanctions, they could be applied to 25 percent of global dairy products, she says.

“Should this eventuate, it would create a dire situation for China and its trading partners, with New Zealand hardest hit given it would need to find alternative markets for nearly 40 percent of its dairy exports.”

What does this mean for farmers, New Zealanders – and the economy?

Fonterra says its current forecast farmgate milk price midpoint of $NZ9.60 per kgMS represents a cash injection of over $14 billion into New Zealand’s economy through milk price payments alone.

It’s also good news for farmers facing rising on-farm costs, including from inflation and rising interest rates, Fonterra says.

“The higher forecast farmgate milk price puts pressure on the co-op’s margins in consumer and food service, but prices in our ingredients business remain favourable for milk price and earnings at this stage.

“Global dairy prices can be volatile, that is why we always take a longer-term view when determining our prices. However, when there’s a sustained increase in global dairy prices we can reasonably expect that these will flow through to consumer prices eventually.”

Dairy NZ chief executive Tim Mackle says while increased milk prices are positive, farmers are also dealing with a number of higher costs.

“The increased expenses are due to debt costs from forecast increases in interest rates and fertiliser, which has been affected by rising shipping costs and geopolitical changes.

“Labour is also a significant cost – the record-low unemployment rate and border closure means farmers and their families are carrying a heavy workload, despite increasing pay in order to attract staff.

“With the government introducing significant regulatory changes, farmers are already facing higher costs and need to budget for ongoing regulatory costs.

“Positively, regional communities and New Zealand as a whole will benefit from the forecast lift in milk prices. Dairy will contribute an estimated $49b to New Zealand in 2021/22 (this includes direct and flow-on income to the economy). This is up from around $37b in 2020/21.”

In dairy risk management, one size does not fit all. Throughout recent history, a number of dairy-related risk management programs, some available through private crop insurance providers and others available through the Farm Service Agency (FSA), have been designed to fill gaps in protection against market risk and uncertainty.

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