Strong dairy season predicted

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Falling global supply growth sets the tone for a strong 2018-19 dairy season, Rabobank's latest dairy quarterly report says.

Supply growth across the big seven dairy exporting regions had stalled in recent months and global farmgate milk prices were expected to move seasonally higher through the second half of 2018.

The rally in global commodity prices — driven by unfavourable weather which tempered milk production in the EU spring peak — and expectations for the New Zealand dollar to ease slightly, had fed into the bank's revision to its full-year forecast from $6.40 to $6.80 for the new season, report author and dairy analyst Emma Higgins said.

Assuming normal weather conditions, it was expected New Zealand milk production would lift by 2 per cent in the coming season.

Many buyers across the globe had cover and would remain sidelined in the coming months. However, China was expected to re-enter the market in a more meaningful way in the second half of 2018.

Much of the production growth out of New Zealand was expected to be absorbed by increased demand from China, which was heavily reliant on New Zealand product, particularly whole milk powder, Ms Higgins said.

Without a disruptive event, global dairy markets should continue to be relatively stable, with global commodity prices expected to be largely range-bound for the rest of the year.

But, she warned, it was "not all smooth sailing" as there were some real risks to the outlook — including potential for further culling of the New Zealand dairy herd due to Mycoplasma bovis disease and an escalation in trade tensions between the United States and Mexico, China and Canada.

The new production season began on June 1 with a "cloud of uncertainty" as the Government announced phased eradication of Mycoplasma bovis.

The disease did not impact milk quality but affected productivity. The decision to slaughter 126,000 cows — including young stock — over the next one to two years, in addition to the 23,000 cows culled earlier this year, would not have a significant impact on short-term milk production.

Farmers would have some flexibility as to when the cows were culled. It was likely that many cows would be milked over much of the season, before heading to slaughter.

As a result, those farms impacted had time to organise a new herd, following a mandatory 60-day livestock-free period after depopulating their infected herd, the report said.

Further testing for the disease would occur over the coming months and the number of cows and young stock culled could potentially be greater. Discovery of a single infected cow resulted in the culling of the entire herd.

The more immediate impact of Mycoplasma bovis would emerge through increased farm costs as dairy farmers across New Zealand increased on-farm biosecurity measures and mitigated risk to the disease where possible, the report said.

Furthermore, a new levy would be issued to dairy farmers to cover some of the compensation costs for culled herds, the finer details of which were still to be announced, the report said.