While farmgate milk price forecasts for this season are holding at around $9/kg for milksolids, nervousness abounds, and the weak trend now appears to be downwards throughout the first six months of 2023.
Prices have fallen in eight of the past 12 GDT auctions, spanning six months from late July until early January.
After a modest collective 3% increase in the GDT price index in late November and early December, two auctions over the Christmas-New Year period produced consecutive 3.8% and 2.8% falls.
After the peak of 1593 on March 1 last year, the GDT index has fallen 35% throughout the year to sit at 1031 currently, which is around the median level for the past decade.
The price of whole milk powder has fallen to US$3200/tonne, at which the milk price equivalent is more like $7 than $9.
But farmers and their processors benefit from a New Zealand dollar lag effect when treasury groups hedge future sales at favourable exchange rates.
ASB senior economist Chris Tennent-Brown said Fonterra is likely to be 90% hedged for the current season at a rate a little north of US64c, which is a favourable rate from an historical perspective.
“The big challenge for forecasters is judging whether this period of comparative USD softness is a blip or a shift that will be sustained.
“It’s a question that will be important for next season’s milk price forecast, and more broadly for exporters’ budgeting and hedging decisions.”
Westpac senior agri economist Nathan Penny expects dairy prices to continue to fall during the first half of 2023, followed by improved global demand and price from the middle of the year as Chinese covid restrictions are eased further.
“Our expectation for a stronger global dairy market from around mid-2023 sets up the 2023-24 season for a bumper milk price,” he said.
Westpac’s opening forecast for 2023-24 is $10/kg. Its current forecast for 2022-23 is $8.75.
ANZ agricultural economist Susan Kilsby believes dairy commodity prices have stabilised and that farmers’ returns for milk next season will be similar to this season – around $8.75.
“Farm gate prices are supported by the lower NZD but market uncertainty remains extremely high.
“Global milk supplies are tight, which will support prices, but demand for dairy products
is weakening.
“It is not yet clear whether the reduced availability of dairy products will be sufficient to offset
lower demand,” Kilsby said.
She said both supply and demand are weaker than normal at the moment, which is expected to keep prices near, or slightly above, current levels for the rest of this season.
“Looking further ahead, it is less clear whether deteriorating economic conditions in key markets will result in softer prices.
“Weakening demand is the largest risk at present to next season’s farmgate milk price.”