Senior economist Doug Steel wrote in his April Rural Wrap that global dairy prices are expected to drift lower in 2018 but the downside risks had moderated with a strong Euro currency, higher oil prices and robust dairy product demand.
A significant assumption in Steel’s forecast was that whole milk powder prices would remain in the band of US$2900 to $3300/tonne for the next 12 months.
They sit at $3200 on the NZX Dairy Derivatives market for WMP futures and the latest Global Dairy Trade auction outcome included a $3278 average for WMP.
If WMP prices were to persist at those levels the BNZ model generated $6.70/kg as an indicative milk price.
That possibility is quite attractive considering WMP prices have remained relatively stable over the past year and have therefore led to a season of low movements in Fonterra’s farmgate milk price forecast.
That 35c range ($6.40 to $6.75) was the tightest forecast range in the past 10 seasons, during which Fonterra hammered the word “volatility” as a warning to farmers.
The BNZ downside scenario assumed WMP prices about $2700 for an indicative milk price of $5.50.
Among the downside factors were increased European Union milk production and reduced intervention, a low Euro, higher milk production in the United States, slower global economic growth stemming from trade disputes, lower growth in China denting dairy demand, and lower oil prices.
The upside scenario using $3700 for WMP produced a milk price indication of $7.20.
Steel’s upside factors were some combination of moderating milk supply in EU and US, stronger Chinese demand, further higher oil prices, a weather event in a major milk producing area and higher international grain prices.
The scenarios leading to higher and lower milk prices might seem unlikely given the relative stability in recent times but Steel reminded farmers of the large, rapid swings in WMP prices in history.
“In the not too distant past we have seen WMP prices double or halve in a 12-month period.
“It would be foolish to think that volatility could not return.
“But it is important to recognise that global supply seems more able to respond if and when price pressure occurs, helping reduce price variation.
“The farmgate milk price is very difficult to forecast.
“This stems from the nature of the international dairy market including the inherent biological and system supply lag times to respond to price changes, a diverse set of demand drivers across the globe, relatively little product traded across borders but big domestic milk markets around the world, weather risks and political and trade access risk, all of which is then overlaid with the vagaries of currency markets.”
For Fonterra farmers, BNZ also forecast 30c/share dividend this season, giving a total payout of $6.85/kg and a return to 40c next season.
Fonterra was expected to make its first 2018-19 forecast in late May.
