Rabobank dairy analyst Emma Higgins said she remained comfortable with her $8.20/kg forecast for this season, but she told NZME’s The Country much would depend on China – New Zealand’s biggest customer for dairy.
“We think the triggers for the rebalance of China’s local situation are in play and that a weak milk price in China would be helpful,” she said.
She added the cost of production for the bigger farms in the PRC was rising and that they were starting to feel the pinch.
“Therefore we expect to see the milk price slow down as we move through the course of this year,” she said.
“The challenge right now is that we are still seeing oversupply and we are hearing reports of milk being dried into powder, and that’s the hesitancy that we see in GDT.”
While an $8 milk price looks attractive, relative to history, rampant on-farm inflation and higher interest rates mean many farmers would struggle to break even at that price.
Fonterra paid its highest-ever price of $9.30/kg in 2021/22 and $8.20/kg is pencilled in for the 2022/23 season just finished.
ASB expects to see a milk price either at or below the bottom end of Fonterra’s $7.25 to $8.75/kg range and the bank gives ongoing concerns about China as the main reason for its caution.
Up until today, Westpac has been sticking with $10/kg but the bank is now looking at $8.90/kg.
“Global dairy consumers have fallen in love with cheese, with cheese prices sizzling at or near record highs since late 2021,” Westpac senior agri economist Nathan Penny said.
“Unfortunately, New Zealand is not well placed [relatively] to take advantage of this trend and total dairy farmer incomes will be lower than they would ordinarily be,” Penny said.
“As a result, we lower our 2023/24 milk price forecast to $8.90/kg,” he said in a report.
“At the same time, we expect significantly larger Fonterra dividends on the back of higher profits in its cheese [and protein] businesses, albeit these dividends won’t fully offset our lower milk price forecast.”
Last month, Fonterra said it expects normalised earnings per share of 65-80 cents for 2022/23.
“Assuming it pays 70 per cent of its earnings as a dividend, this equates to a dividend of between 45.5 and 56 cents per share,” Penny said.
“We anticipate that Fonterra will continue to pay a similar dividend over 2023/24,” Penny said. “Adding this together to our forecast milk price equates to between $9.355/kg to $9.46/kg.”
NZX analysts said South East Asia/Oceania was the biggest buyer at this morning’s auction.
“North Asia was buying, but definitely not in a way that implies China is back,” NZX analysts Alex Winning and Amy Castleton said.
“There has been talk of prices bouncing around in a bit of a channel, which seems to be where things are at now,” they said in a report.
“Both demand and supply are relatively steady overall, with not much to swing things one way or another.”
The Middle East bought the most cheddar at the event, they said.
“It seems likely that this was one buyer fulfilling some immediate needs, rather than indicative of any trend.”
