Dairy price surge may not last long
Another spike in global dairy commodity prices should mean a bit more cream on this season’s Fonterra payout and a positive payout start to the new season, but the record prices will likely run out of road after mid-year, economists suggest.
By then the supply pressures behind the price surge, New Zealand’s drought and a sharp decline in Australian production, will have eased, and northern hemisphere new-season milk production will be hitting the world market.
BNZ senior economist Doug Steel said a genuine increase in demand for protein, particularly from China, was also fuelling the price bonanza, which saw the average price on Fonterra’s GlobalDairy Trade auction this week surge 14.2 per cent on the last auction. It was the eighth straight gain in average price and the third consecutive auction with double-digit price gains.
Steel believes there is room for a little upward movement in Fonterra’s $5.80-per-kilogram milksolids payout forecast for the current 2012-2013 season, and for upward pressure on the forecast for the new season, which starts in June.
But while the North Island, in particular, is expected to face a long and slow recovery from the drought, Steel cautioned against over-optimism that the current high world prices will carry into the new season.
ANZ rural economist Con Williams also thinks the strong world prices will provide buoyancy for this season’s final payout and next season’s prospects, but is expecting ‘‘recoil’’ from market buyers.
Williams noted the steep, near 28 per cent rise to US$5142 (NZ$6118) a tonne in the average price of skim milk on the auction. Given that New Zealand did not make a lot of skim-milk powder, it suggested supply of skim-milk powder in the northern hemisphere was tighter than expected, he said.
New Zealand, the world’s biggest dairy exporter, mostly produces wholemilk powder, which rose 7 per cent to earn an average price of US$5100 a tonne in this week’s auction. But, given contract prices for supply of Fonterra wholemilk powder to be supplied in August hit US$6100, the price levels are ‘‘self-limiting’’, he said.
Prices were now entering charted territory, he said.
New Zealand Institute of Economic Research principal economist Shamubeel Eaqub said the
un- world prices could hold firm until the northern hemisphere dairy season got fully under way.
But whether New Zealand dairy farmers and, in turn, the economy would benefit from the droughtdriven price surge was hard to call.
The payout might lift, but farmers’ milk production was down. The strong prices boosted the kiwi, which was bad news for exporters but good for the New Zealand consumer, at the petrol pump, for example.
‘‘It’s a balancing act. It’s very hard to get some sense of it [the impact on the economy] because it is so driven by short-term demand impact.’’