Economists were dusting off their forecasts after dairy prices slumped by 7.4 per cent at this morning’s Global Dairy Trade auction, led by a 10.9 per cent fall in whole milk powder (WMP) to a
Economists go back to the drawing board after dairy price slump
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Cheddar was the only product to gain, with others at the Global Dairy Trade falling. Photo / Getty Images
Cheddar was the only product to gain - firming 5.8 per cent to US$4127 a tonne. The average price across all products on offer was US$2875 a tonne.
ASB Bank has cut its farmgate milk price forecast to $6.60/kg from its previous forecast, issued at the start of the year, of $7.00/kg.
“There is plenty of uncertainty at this stage in the season, and there are some upside risks as well as downside ones,” ASB economist Nathaniel Keall said.
“Nonetheless, we think it is prudent for farmers to be budgeting on a milk price in the lower half of Fonterra’s present guidance range,” he said.
BNZ economist Doug Steel has cut his forecast to $6.70/kg from $7.60/kg.
“It all adds up to a strong and intensifying headwind to the economy overall,” Steel said.
Westpac agri economist Nathan Penny said it looked like Fonterra’s forecast range of $6.25-$7.75 per kg - seen as surprisingly weak when it came out early this month - was being borne out.
Stu Davison, a consultant for Chicago-based commodities firm HighGround Dairy, said he was expecting a “bloodbath” at the auction and it delivered.
“GDT is a very good measure of demand and we saw really weak demand at this auction,” he said.
The bidding was at 1.5 times the amount of product on offer. The norm for a poor auction is around 2.0 times and for a strong auction, the bidding usually runs at about 4.0 times.
“The bidding was just so weak, it was not moving prices up.
“Demand simply is not there in the market and buyers are not willing to chase prices higher.
“It went lower because no one really needs the product on hand.”
In whole milk powder, China was the biggest buyer - taking 45 per cent of the product on offer.
“There is no competition from anyone, so they [China] can take the top spot.”
Fonterra last week cut its 2023/24 season forecast farmgate milk price range to $6.25-$7.75 per kg of milk solids, with a midpoint of $7.00 per kg - well short of break-even for many farmers.
After this morning’s auction, Davison said the milk price may now start with a $6.
“We could see at least another half a dollar wiped off the forecast if these sorts of prices persist for the next few months, and to be honest I expect September to be just as bad.”
NZX dairy analyst Alex Winning said the derivatives market had held ahead of the auction but there should be a response from the market over the next couple of days.
“From a macroeconomic perspective, there isn’t any indication that supply is easing anytime soon, and with less confidence in Chinese buying power, there’s very little to indicate a lift in commodity prices in the near future,” she said in a commentary.
Prices for most of New Zealand’s main commodities - dairy, meat and logs - have been weak due to soft demand from China, the country’s biggest export customer.
The milk price is the main source of income for dairy farmers, but Fonterra’s shareholder suppliers have at least some offset in the form of what is expected to be a strong dividend for the 2022/23 year.
The co-op expects to end the year at the top end of its forecast earnings range of 65-80 cents per share.
It also expects to pay a full-year dividend at the top end of its dividend policy, which is 40-60 per cent of normalised earnings.
Fonterra’s result is due in September.
This week, Fonterra will pay 50 cents a share to farmers - being the proceeds from the sale of Chile’s Soprole.
In addition, Fonterra will soon embark on a $50m share buy-back, which should be supportive for its share price.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.