Strong dairy prices offer silver lining for battered NZ economy

Dairy prices improved at the latest GDT auction. Photo / Supplied

New Zealand's Covid-battered economy has been offered a ray of hope in the form of strong prices for its biggest export - milk powder - at the latest Global Dairy Trade auction.

An 8.4 per cent spike in skim milk powder prices - a key driver of Fonterra's farmgate milk price - helped drive the Global Dairy Trade index up by 3.6 per cent at this morning's auction.

Prices for the main component - wholemilk powder - were up 3.2 per cent at US$2985/tonne. With skim milk powder trading at US$2889/tonne, the two are close to level pegging.

ANZ agri economist Susan Kilsby said the timing of the price gain, when dairy factories are running at capacity to process milk as the October season peak approaches, was a positive sign but that market conditions were difficult to read due to the impact of the Covid-19 pandemic.

But as New Zealand heads towards what is likely to be its largest recession in a lifetime, Westpac senior agri economist Nathan Penny said the economy would take higher milk prices as a positive.

He said the underlying picture was that demand for dairy was still there and prices were at a stable level.

GDP data out tomorrow is set to show the economy took a big hit over the June quarter which, together with the slight decline in the March quarter, will make for two successive quarters of decline - thereby meeting the technical definition of recession.

Fonterra is due to report its result on Friday. Photo / File

Penny, who has forecast a $6.50/kg milk price for the current season, said he remained cautiously optimistic on the dairy price outlook.

"In the short term, we have allowed for prices to fall as New Zealand production rises towards its peak, before prices firm again later in the season," he said.

"However, it's still early days in the season, and the uncertainties around the Covid impact through the full dairy season remain large," Penny said.

Rabobank's US-based dairy analyst Thomas Bailey said this morning's GDT auction indicated a firming of global demand as buyers, who had been holding back waiting for market direction, stepped up their purchases.

He suggested skim milk powder was being singled out for buying because it can be stored for long periods.

"Skim milk powder prices are now back to February price levels and at significant premiums to the international market," he said in a commentary.

"Several factors are creating this rally in skim milk powder, the preference for New Zealand product remains a key dynamic," he said.

There was also a shift occurring in procurement strategies related to Covid-19, as food security became a priority.

"This shift means ingredient buyers are willing to hold more stocks to avoid any complications in trade challenges," Bailey said.

This appeared to be particularly true for China, which does not make skim milk powder due to an absent market for the milkfat byproduct, he said.

"So the need to shore up New Zealand skim milk powder appears to be at play."

Furthermore, government food buying programs around the world were active, and skim milk powder is an easily stored source of protein.

Today's results should support broader increases in prices around the world, boosting profitability for dairy farmers, and eventually resulting in a bump in milk supplies, Bailey said.

Fonterra, whose turnover last year equated to about six per cent of New Zealand's GDP, is due to report its annual result on Friday.

Expectations are that there will be a significant turnaround from last year's record loss but still well short of previous year's earnings.

The co-op's milk price forecast for the current 2020/21 season is in a range of $5.90 - $6.90 per kg of milksolids, compared with Dairy NZ's estimate of breakeven of $5.80 to $5.90/kg.

The milk price for 2019/20 season sits in a $7.10-$7.20 per kg.