Stuck in first gear

By Gerald Piddock

Each month the Milk Monitor delves into the dairy industry and gives us the lowdown on the good, the bad, the ugly and everything in between.

The dairy market has continued to lurch along over the past month or so thanks to soft global demand and production.

That was epitomised in the June 20 GDT, where the price index failed to move a percentage point, and the two auctions prior to that, where the index fell 0.9%.

It all does little to show where prices may go over the course of the season and it will take a shift in that demand and supply equation for there to be any movement.

Westpac senior agrieconomist Nathan Penny said there could be two circuit breakers that could end this stalemate – a rebound in Chinese dairy demand and how New Zealand’s spring dairy production fares.

“Our view is that Chinese dairy demand still comes through and lifts global dairy prices,” he said in the bank’s Dairy Update.

However, he admitted that the risk is that the expected demand rebound is pushed out even further.

“Meanwhile, spring production can shift the global dairy price dial in either direction. We anticipate a modest 1% production lift over the 2023/24 season compared to 2022/23. However, there is a wide range of possibilities.”

Tight cashflows could reduce input usage despite the recent falls in prices per tonne for fertiliser. The opposite is also possible with farmers experiencing great late winter and early spring conditions through calving, getting them off to a great start to the season.

All things considered, Penny said they are keeping their 2023-2024 milk price forecast at $8.90/kg MS.

Since the last Milk Monitor, Fonterra announced its new season forecast of $7.25-$8.75/ kg MS, with a midpoint of $8/ kg MS.

Speaking on a podcast, NZX’s Alex Winning said Fonterra’s opening forecast was largely in line with expectations, given the GDT results in the lead-up to the announcement.

“I know on the ground here farmers would have loved to have seen a higher milk price, but the milk price influencing commodities – your milk powders, your milk fats – they really haven’t achieved the premiums that they were at the start of the season and that has influenced the final forecasts.”

However, while the opening milk price forecast may be back, Fonterra’s earningper-share forecast is up, on the back of improved premiums for dairy’s valueadded products including nutritional powders, casein and antibiotics.

“They are bringing in record earnings, so while a lower milk price isn’t what you typically want to see, it’s been made for at the other end.”

On that same podcast, Winning was asked where she saw WMP prices heading. She said it was extremely difficult to forecast.

While there is a lot less

WMP in the market at the moment and New Zealand is processing less compared to years prior, what is contributing to the stalemate is low demand from China fuelled in part by its domestic production.

“To see any real shift in product prices, we need to see lowered production out of China,” she said.

However, she was hopeful prices would lift as supply gets lower. But a sense of direction is needed on Chinese milk production before getting an understanding on the extent of that lift.

“And right now, all signs point to good capacity out of them.”

It’s a point similarly made in Rabobank’s latest Dairy Quarterly, which states that, so far, China’s dairy demand has yet to offset strong domestic milk production growth.

“Supply may take longer than previously forecast to respond to weakening milk prices and comparatively higher feed costs. Rabobank does not expect a reversal in farmgate milk prices to occur quickly.”

ASB economist Nathaniel Keall said China was still largely absent from the dairy market and the country will need to return if the milk price is to shift back up to the upper end of Fonterra’s forecast range.

“Given weaker economic data and comparatively strong Chinese dairy production, that’s doesn’t look imminent in our view. We retain our $7.25/kg MS farmgate milk price forecast for the 2023/24 dairy season.”

The growing expectation of a decent dividend may offset some of the anxiety caused by the lower milk price.

In May, Fonterra said that it expects normalised earnings per share of 65-80 cents for 2022-2023.

Penny said that assuming it pays 70% of its earnings as a dividend, this equates to a dividend of between 45.5 and 56 cents per share.

“We anticipate that Fonterra will continue to pay a similar dividend over 2023/24. Adding this together to our forecast milk price equates to between $9.355/kg to $9.46/kg. n