Eight consecutive falls of the Global Dairy Trade (GDT) price index have all but wiped out the extraordinary 15% rise in the market at the beginning of March.
In the five months since, nine out of 10 fortnightly actions have been downward moves in the market and the GDT price index has dropped 13.2%.
In the first auction for August, whole milk powder (WMP) prices fell by 3.8% and have now fallen 19% since March.
The GDT index lost 1%, as the fall in WMP was balanced somewhat by butter increasing 3.8%, anhydrous milk fat (AMF) by 1.3% and skim milk powder (SMP) by 1.5%.
Analysts agree that their farm gate milk price forecasts are threatened by the sustained fall in GDT prices and have put forward several reasons.
Senior agri-economist Nathan Penny says Westpac has taken 25c out of its prediction, now $7.75/kg milksolids.
“Fundamental developments over recent months have been negative for our milk price forecast,” Penny said.
“New Zealand milk production over the autumn was 10% stronger than the previous year.
“Farmers certainly made hay while the sun was still shining, eking out as much production as they could to cash in on the very high milk price on offer.
“This extra milk has continued to reverberate through markets.
“Whole milk powder prices have fallen since March, coincidentally from the time when NZ production started cranking higher.
“Given the sheer magnitude of the extra milk in-market, it’s not altogether surprising that whole milk powder prices have yet to find a bottom.”
Penny is now predicting falling world dairy commodity prices continuing into spring, when relatively restrained New Zealand supply should balance with global demand.
Rabobank dairy analyst Emma Higgins pointed to strong milk production in China, up 8.5% in Q1 2021, plus strong imports leading to high inventories.
“While it is very difficult to obtain full clarity, we anticipate the growth of imports and production combined are outpacing domestic consumption growth, adding to overall stock levels,” Higgins said.
Higgins said Chinese buyers of WMP on GDT were evidently wanting to pay lower prices.
“Our forecast farm gate milk price is a very wobbly $8 and the wobbles are certainly gaining speed,” she said.
Jarden head of derivatives Mike McIntyre saya the next three or four GDT auctions would be key for seeing how this season’s milk price would eventuate.
It is early days for milk collection and it will be the GDT auctions to come when deliveries to China fall into the FTA safeguard window that will provide good analysis.
ASB economist Nat Keall has retained his $7.90 milk price forecast for now, but acknowledged that uncertainty remains high.
“There are consistently clear signs dairy auction prices are correcting faster than many anticipated,” Keall said.
“Distant contracts are experiencing the largest declines, showing prices continuing to lose momentum as the season wears on.”
Keall says Fonterra had considerably reduced its GDT offers of WMP but prices hadn’t risen as a consequence.
“We don’t know what kind of prices Fonterra is seeing outside of the auction platform,” he said.
“The massive reduction in offer volumes does suggest there is a ring of truth to the co-op’s comments about strong demand outside the platform, rather than just spin.”
Farmers might be consoled by the prospect of a result towards the lower end of Fonterra’s forecast range, $7.25-$8.75, because that would still be a good outcome historically.
