Maximum milk price from minimum movement?

What looked like a nil result from the latest Global Dairy Trade (GDT) auction produced a large 10% jump in Westpac’s farm gate milk price prediction, up 75c to $8.50/kg milksolids.

That is near the top of Fonterra’s current milk price forecast range, $7.25 to $8.75.

Senior agri-economist Nathan Penny didn’t cite GDT prices but the latest reports of milk production, which he said pointed to a fall in New Zealand this season, coupled with soft production in other major milk countries.

“We expect weak global supply to underpin global dairy prices at or around current high levels for at least the rest of year,” Westpac wrote.

NZ production is now forecast to fall by 1% this season, whereas Penny’s previous expectation was for a 1% rise.

Winter and spring have so far been cold in many parts of the country, year-to-date milk output is down 1.8% and it will be hard to recover that loss when comparing monthly totals against last season’s bumper autumn.

European production is only steady in the first seven months of 2021, while China and the United States are constrained by very high cow feed costs.

The GDT price index was unchanged after the October 6 auction, incorporating 0.4% increases for butter and anhydrous milk fat, 0.7% rise for cheddar, 0.5% lift for skim milk powder and minus 0.4% for whole milk powder.

ASB economist Nat Keall says tighter milk supply and resilient demand are likely to keep dairy prices well-supported over the remainder of the season.

“Given the current strength in prices, anything other than a sharp-ish decline at each GDT auction continues to imply a solid farm gate price for the season, and our forecast remains at $8.20,” he said.

NZX dairy analyst Stuart Davison says some volumes offered for the GDT auction were left unsold, which dampened down the market demand talk.

The lack of price movements confirmed that there was still good demand, but buyers were unwilling to secure any more than a bare minimum of products.

Penny also sounded a note of caution about $8 milk price forecasts, saying that level is getting close to Fonterra’s upper limit of payout.

His reasoning was that higher milk prices make it harder for consumer products businesses and that Fonterra is constrained in processing capacity for higher-value products.

ANZ agricultural economist Susan Kilsby also added 50c to the milk price forecast, increasing it to $8.20.

She said dairy commodity prices had improved as the season progressed and were now holding at elevated levels.

ANZ analysts did expect some softening of dairy prices before the end of the season.

The NZ dollar had not appreciated quite as quickly as first factored into the milk price computer model and at this time of the season the dairy companies would have hedged a large proportion of their needs for currency exchange.

“This will have reduced the risk of a strengthening NZD eroding the farm gate milk price,” she said.