Friday, March 29, 2024

Dry feeds higher prices

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Dry weather in most of the dairying regions has raised the expectation that the prices of dairy commodities will go higher, analysts believe.
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The Global Dairy Trade index of prices rose 1.7% in the second auction of the new year, following a 2.8% rise in early January.

Whole milk powder prices increased by 2.4%, rennet casein by 4.7% and butter by 5.5%.

Skim milk powder prices grew a more modest 0.7% but have climbed an extraordinary US$678/tonne or 28% since June.

The margin between WMP and SMP is now $200/tonne, which ASB senior rural economist Nathan Penny said was more like the long-term average premium for WMP of 6-7%.

Over the period 2017 and 2018 the margin had widened to $1000/tonne, which was an over-statement because of the depressing effects of the European Union stockpile of SMP.

Now that had been cleared, and the Chinese demand for dairy protein was as buoyant as the demand for milkfat, SMP had regained its relativity to WMP, he said.

The developing dry weather in New Zealand was likely to depress milk production during the rest of the dairy season, putting further upward pressure on prices.

Westpac has lifted its farm gate milk price forecast by 30c to $7.40/kg.

Senior economist Michael Gordon said the dry weather was a short-term upward influence but he still expected some easing in prices during the year as China’s economic growth slowed and trade tensions remained high.

Although NZ milk production was up 0.5% at the end of November, dry weather since then was expected to cause milk production to fall short towards the end of the season.

The effects of the Australian bush fires on dairy production were not yet known, but that country’s output in 2019 was down 7% over 2018.

Penny’s conclusion on the constrained milk production prospects, here and across the Tasman, was a long-run farm gate milk price of $6.50 to $7.50.

When NZ had the capability of increasing milk production 5% or even 10% in a season, we were the marginal producer in the world and that tended to result in lower and more volatile prices.

Now that volatility had diminished, as evidenced by the narrower range of GDT index movements during the past three years – plus or minus 10-15% around the index level of 1000.

During that time NZ milk prices had risen to the levels of Europe and the United States.

Milk powder prices in the range $3000 to $3500/tonne with a current NZ dollar exchange rates would consistently deliver milk prices of $6.50 to $7.50, he said.

His forecast for this season and next is $7.50.

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