Price remains resilient

Words by: Amy Castleton

Dairy commodity price movements were mixed in November. Prices fell 2% at the first Global Dairy Trade (GDT) event of the month, but increased 1.8% at the second event. This leaves the average price across all GDT commodities about where it was at the end of October.

Demand for dairy still seems to be largely resilient, though some commodities remain impacted by the state of the global food service sector.

This is particularly evident in butter and anhydrous milkfat prices, which remain considerably down on year-ago price levels. Cheddar is also affected to some degree but less so than the fat products, as mozzarella tends to be more used by the food service sector than cheddar. Global milk supply is also building, though this seems to be having little impact on commodity prices to date. Buyers and sellers of dairy commodities seem to be more concerned about Covid-19 and its impacts than the volume of product that is likely to be available.

United States milk production was up a huge 2.3% year on year in September. European Union milk production was up a smaller 0.7% (indicative at the time of writing) – while a small increase in percentage terms, Europe produces a large enough volume of milk that even a small increase can be significant. Australian production was up just 0.2% year on year in September – its smallest increase for several months. However year to date production is up 2% and Australia has continued to have a good season so expectations are that milk will continue to grow.

New Zealand milk production was up 1.8% year on year in September on a milksolids basis. October production is yet to be released at the time of writing; however our expectations are that we will see a smaller increase in October. Soil moisture had largely continued to decline through late October and the first half of November, particularly in the upper half of the North Island and that impacted pasture conditions.

North Island peak milk production reportedly occurred a little earlier in the month than usual, and pasture quality has now turned, with pastures heading into their reproductive stage rather than growth. However a bit of rain in late November means there is plenty of pasture about, even if the quality is not as good. November production is therefore expected to be flatter, but we’re unlikely to see a fall. Overall we still expect to see growth in NZ milk production for the 2020-21 season.

The excellent dairy commodity prices also continue to be reflected on the NZX Dairy Derivatives market, notably in milk price futures. At the time of writing, the September 2020 contract sits at $6.95/ kg MS. This is above the mid-point of Fonterra’s forecast range. The NZX forecast is over $7/kg MS, at $7.13/kg MS.

The September 2022 milk prices futures contract is $6.70/kg MS, with some decline in commodity prices expected next season. Assuming Covid-19 gets under control early next year (and that is a big assumption!) growing milk supplies are likely to weigh on commodity prices, especially if there is some hangover of product in storage. Even if Covid-19 is not under control, we may see a decline in demand that weighs more heavily on prices with many economies experiencing large drops in Gross Domestic Product (and thus incomes). A $6.70/kg MS milk price would still be an excellent result but there is certainly downside pressure on this.

• Amy Castleton, senior dairy analyst at NZX Agri.