A predicted slowdown in Chinese import demand for milk powder is why Rabobank has trimmed 20c from its farm gate milk price forecast, now $7.80/kg milksolids.
The analysis of China’s needs and the cut in milk price expectation were done before the latest Global Dairy Trade (GDT) auction, in which the price index rose 4% and whole milk powder rose 3.3%.
Rabobank senior analyst Emma Higgins says all eyes are on China, our key export market, as the risk of downside in the milk price forecast.
“Supply is outpacing demand in China, with domestic milk production growth combined with growing inventories of dairy products,” Higgins said.
“These factors point to the potential for a period of destocking later this year and into 2022.”
Higgins says GDT prices had moved sideways or lower for the past six months, until the latest lift.
“Despite last week’s lift, we see a strong possibility that the near-term peak in global prices is likely behind us,” she said.
“Our $7.80 forecast is at the lower end of all analysts’ expectations right now, but it would still be an excellent result for our dairy farmers – the second-largest in Fonterra’s history.”
Rabobank’s Dairy Quarterly Report said China’s own milk supply is growing 6-7% annually and its milk powder importing has been up 40% in the first half of 2021.
It forecasts that importing will fall by 18% in the second half to drive some destocking.
Higgins also commented on other global supply and demand dynamics, which would influence the farm gate milk price.
The shape of the NZ spring peak and how global dairy demand holds up in the face of reductions in fiscal aid from governments worldwide.
High feed costs and growing margin pressure in the northern hemisphere may influence milk production, along with the added strain of inflation.
But while Rabobank counselled caution, BNZ senior economist Doug Steel published an upbeat research note on the milk price outlook and raised his estimate 50c to $8.30.
He says the balance of risks surrounding the milk price forecasts had moved upward and the $8.30 was not a precise estimate because of the time of the season and all the moving parts.
“The bounce in GDT prices follows a general lift in global risk appetite over recent weeks helping underpin demand,” Steel said.
There was firmness to the underlying demand and forward price curves showed high prices extending into next year.
Fonterra had removed quantities of WMP from the GDT platform citing strong demand through other sales channels.
Milk production growth in the European Union had been subdued.
“We still don’t expect a strong global milk supply response to strong dairy prices,” he said.
Even though the NZ season has started strongly and grass growth has been favourable in most of the country, BNZ doesn’t expect milk production this season to be greater than last season.
That is due to good production last season and the trend to fewer cows.
Steel pointed out that the NZD had risen 2.6% in value against the USD in the three weeks before the latest GDT event, which tended to work against the 4% index lift.
In summary, “the dynamics and balance of risks appear to be changing with robust demand bumping up against subdued supply”.
