Tough conditions left New Zealand milk production for August down 4.9% year on year, at the lowest August volume for five years
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Why New Zealand's milk supply problems will impact global prices
Dairy cows graze at a farm that supplies to Fonterra Cooperative in Hamilton, New Zealand. In Europe and New Zealand, ever stricter environmental regulations are keeping a lid on dairy growth. Picture: Brendon O'Hagan/Bloomberg

Fears that a difficult early season could leave New Zealand’s annual milk supply as much as 3% behind last season are likely to underpin global milk prices.

The country’s dairy farmers had a very tough time coping with New Zealand’s warmest and wettest winter (June to August) on record.

With the calving season from August to October, as the weather transitions from winter to spring, tough conditions left New Zealand milk production for August down 4.9% year on year, at the lowest August volume for five years.

Drought at the end of the last milk season hit cow conditions and winter feed provision. There has been no let-up for dairy farmers, with the winter months bringing record July snowfalls in the South Island, followed by extreme rainfall throughout New Zealand that caused severe flooding and landslides. In August, some areas got a year’s rainfall in three days. Now, high soil moisture remains a problem for many farmers.

Fonterra, the country’s dominant milk processor, says production will be down 1% for the season. The ASB Bank goes further, predicting that New Zealand’s seasonal supply will be down between 1% and 3% on last season (which also had lower production than the previous year). Rabobank expects this year’s NZ milk output to match last year’s at best, or at worst fall 2%.

Bitterly cold conditions for the first week of October continued the weather challenge, as farmers waited for favourable grass growth and grazing conditions. Meanwhile, high feed and fuel prices leave profit margins at disappointing levels, despite high milk prices.

As the world’s largest exporter of dairy products, New Zealand’s supply problems there can have a major impact on global markets, especially now when undersupply for more than a year has left milk and dairy product at record prices globally.

Despite these high prices, it is only in the USA that milk production is recovering, with the strongest year-on-year monthly gain for 15 months recorded for September (despite high feed costs). In Europe and New Zealand, ever stricter environmental regulations are keeping a lid on dairy growth.

The Australian milk supply also started 2022/23 on a weak note. On top of last season’s 4% fall in the national milk supply, it was more than 8% down early this season. There is scope to recover unless there are weather shocks, but too much rain has left dairy farmers still waiting for paddocks to dry up. Milk production is 20% back in the worst-hit areas.

In South America, economic instability is reducing investment in dairy. In Argentina, 2022 dairy production will at best match 2021. But a 2% increase is forecast for 2023. An annual EU milk collection decline of 0.5% is predicted for 2022, by the European Commission, which says the supply could drop by a further 0.2% next year.

Along with high input costs, summer droughts have left a winter feed deficit. Across Europe, both milk fat and protein content fell 1.2% in the first half of this year, on top of milk deliveries falling 0.5%. This lower availability of milk solids for processing is expected to continue.

On the global demand side, the reduced 2022 imports by China are expected to continue, at least into early 2023. Other importers have kept global prices high, but price inflation increasingly threatens global consumer demand.

Fonterra Cooperative Group, the world’s biggest dairy exporter, raised its earnings forecast for the second time in three months after a strong first quarter driven by demand for protein products.

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