All eyes on China

By Gerald Piddock

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

Dairy prices have made a decent comeback after four months but whether that momentum remains depends on China.

We finally saw some increases in demand from that market after it lifted its zero-covid policy when the GDT bounced back on February 7 with a 3.2% lift.

It was the largest price index increase since September 6 last year. Whole milk powder lifted 3.8% and butter and AMF jumped 6.6% and 4.8% each.

What the dairy market will be hoping for now is for that momentum to help rebound the Chinese economy following the end of its lockdown.

This along with the global milk supply will have a major effect on whatever the milk price ends up for this season and 2023-2024.

ANZ senior economist Susan Kilsby says in the bank’s latest bi-monthly Agri Focus that how quickly Chinese consumption picks up will be the key factor in dairy demand.

“China is expected to increase its buying volumes as demand for dairy products rebuilds as the economy bounces back from covid-zero. However, it is not clear how long it will take for this to occur as dairy is a luxury good for many Chinese consumers.”

Because of that, consumers will need to feel positive about their financial position before a meaningful impact on demand is seen, she says.

She also expects prices to gradually lift this year with the overall trend to be positive.

Westpac’s Nathan Penny says that products such as butter will benefit most from looser covid restrictions as more consumers can enter food service outlets.

“Indeed, that was the case overnight, with butter posting the largest price rise. Over coming months, we expect prices to gain further momentum as Chinese demand continues to rebound,” he says in the bank’s Dairy Update.

He forecasts the Chinese economy to grow by 6% from 3.5% in 2022 and says strengthening household spending will be a key driver of economic growth over the year.

Rabobank senior agricultural analyst Emma Higgins cites China’s reopening as one of four wild cards facing the primary sector this year.

“We expect a light recession in China, already kicked off in quarter four 2022, to end in the first quarter of this year. We think the journey might still be a bit bumpy, but there remains a chance that demand could improve earlier than forecast.”

The three other wild cards she identifies in the bank’s Agribusiness Outlook 2023 report are inflation, market signals for low or zero emission products and the upcoming New Zealand election campaign.

These factors have drained sentiment among food producers, highlighted in recent confidence surveys.

“And all of this exists amidst a potent background of climate change urgency, a cost-of living crisis, geopolitical fragmentation and extremely tight labour markets,” she says.

The return of demand from China is of course good news for the milk price forecast with it re-affirming Westpac’s $8.75kg MS for this season. ANZ is more pessimistic, with the bank dropping its forecast by 25 cents to $8.50kg MS, largely due to the weakening NZ dollar.

ASB has the gloomiest outlook. While the auction was a positive for this season’s $8.65/kg MS forecast, looking ahead to next season its forecast sits at $7/kg MS in its Commodities Weekly publication.

Economist Nathaniel Keall acknowledges this is more conservative than recent futures pricing that has forecast it at $8.50-$8.75kg MS, which is where most of the other banks have their new season’s forecasts, too.

“Our view rests on the expectation dairy prices to move lower over the second half of 2023 and early 2024. We are more pessimistic on the outlook for the global economy this year.”

There’s also speculation of recessions among many of the world’s major economies, he says.

He is also cautious about the magnitude of the pick-up in Chinese demand. While that economy will come back this year, forecasters are projecting GDP growth of around 5%, one of the weakest expansions since the 1990s.

The final piece on this playing board is milk supply. Domestically, production has taken a hammering from the disruptive weather this milking season, particularly in the North Island where milk collection is down 4.1% in the season to date, according to Fonterra’s Global Dairy Update for January. That same document has overall production down 3.8% for the 12 months to December.

The impact of Cyclone Gabrielle will only compound all this.

Meanwhile, in the northern hemisphere, supply is expanding both in the United States and Europe.

With farm input costs still high, it could mean the industry could be in for a bumpy ride.