In an update on the dairy industry on Friday, ANZ rural economist Con Williams and chief economist Cameron Bagrie lowered the bank’s forecast for the 2015/16 season to $3.95/kgMS, from its previous estimate of $4.25/kgMS.
ANZ’s estimate, if it pans out, would mark the lowest milk price since the 2006/07 season when Fonterra paid $3.87/kgMS. The Auckland-based dairy cooperative cut its own forecast to $4.15/kgMS from $4.60/kgMS ahead of the latest GlobalDairyTrade auction.
Economists are revising their forecasts for Fonterra’s payout after prices declined at the third straight GDT auction this year. The price for whole milk powder, New Zealand’s key export commodity, slid 10.4% to US$1,952 a tonne, the lowest since Aug. 18. ASB Bank, Westpac and Bank of New Zealand have signalled their expectations are also either under review, or face downside risk.
“Short-term dairy market dynamics are very challenging,” ANZ said in its note titled ‘Lower for Longer’.
“The current issue is far too much supply for the market to handle. Part of this is seasonal, which should eventually rectify itself. However there are also two structural shifts in the form of increased European supply and a lower cost of production to consider. Both these factors are expected to supress prices for some time to come.”
European milk supply is expected to show annual growth of at least 5% in the year through April, while China’s own milk supply is on the seasonal increase, reducing its need for imports, and US supply has been stronger than anticipated, ANZ said.
Meanwhile, New Zealand milk supply has held up better than expected this season, and ANZ expects it will be down just 3%, compared with earlier estimates of a 6% decline, as conditions improved following regular rainfall across many parts of the country since the start of the year.
ANZ said the “resilient” New Zealand dollar had been a factor in its estimate for lower milk prices.
A lower New Zealand dollar had been a key part of ANZ’s forecast for the 2016/17 season, however the kiwi’s resilience suggests it may now be above 65 US cents rather than below it, prompting the bank to cut its forecast for the 2016/17 season to $5/kgMS from a previous estimate of $5.50/kgMS to $5.75/kgMS. The opening forecast for next season could well be below $5/kgMS, with further deterioration in international prices likely in the short term, it said.
ANZ said the economic knock-on to the dairy sector and broader economy will be substantial, given the sector accounts for just under 5% of GDP directly and close to 10% indirectly.
While this ups the ante on the Reserve Bank to lower interest rates, the rest of the economy is generally vibrant and performing well, and ANZ said it’s sticking with its view that the RBNZ will remain on hold.
