Milk payout outlook tightening: analysts

Fonterra’s already-squeezed milk price forecast could slide closer to $6/kg, say economists. With 80 per cent of the New Zealand raw milk market, Fonterra is the national milk price setter.

Bumper spring milk volumes are dampening dairy prices, prompting Fonterra last month to reduce its forecast milk price to farmers for this season from $6.75/kg milksolids to a range of $6.25-$6.50.

Now, just a month later, with milk flow still strong and prices on the world market barometer Global Dairy Trade (GDT) auction platform down 18 per cent since May, economists think Fonterra may have to ease the forecast again, to below $6.25.

Former ANZ agriculture economist, Con Williams, head of investment research at Myfarm Investments, said another 25c may come off the forecast at some point.

His successor at ANZ Susan Kilsby said “even the lower end [Fonterra’s forecast] might be slightly optimistic the way I’m reading the market”.

The 18 per cent fall in average prices on GDT since May suggested strong global market demand was abating, but on the potential upside was New Zealand’s relatively weak dollar which supports milk price, and high prices for livestock feed in Europe after a dry summer which could stem production, she said.

In the latest GDT auction on Monday night, prices fell 2 per cent overall. The price of wholemilk powder, New Zealand’s main dairy export and the foundation of the milk price to farmers, dipped 2.9 per cent to US$2655/tonne.

ASB economist Nathan Penny said overall GDT prices had fallen in 10 out of the past 11 auctions, now at their lowest level since August 2016. ASB recently revised its milk price forecast down from $6.50 to $6.25 and Penny said there is now downside risk to that.

“The key factor is New Zealand production is very strong — 5 per cent ahead of last season so far. That’s put pressure on our forecast.”

Kilsby said several influences could offset the price effect of New Zealand’s strong production season so far.

European farmers had come through a dry summer and used a lot of their winter feed so feed was now costly. Australia was struggling with drought and there was potential for a dry summer in New Zealand too.

“Fonterra’s milk production forecast is very strong but we’d be unlikely to see that much milk if we get a dry summer,” Kilsby said.

When Fonterra cut its milk price forecast last month it also raised its volume forecast by 1.3 per cent to 1550 million kg milksolids.

The strong spring flows are on the back of three seasons of falling production but the size of the rebound has been a surprise, Penny said.

Kilsby said the biggest risk to milk prices was potential weakness in the China market.

“Their economic growth rates are slowing though the economy is still growing, which affects discretionary spending and in China you’d put dairy products into that category.”

The trade war with the US could mean China does not get its normal export orders which would crimp imports.

The ANZ was reviewing its $6.40 milk price forecast, Kilsby said.

For now ASB was sticking with $6.25, Penny said.

Meanwhile the US Dairy Export Council has reported “aggressive” milk powder sales to Mexico and southeast Asia in September.

The council told the Herald US wholemilk powder production was up 49 per cent this year. Spokesman John Dutcher said the aggressive selling was possibly a move to avoid inventory build-up. Total US wholemilk exports for the month were up 164 per cent at 6655 tonnes, the highest in more than eight years.