Economists, who believed not so long ago that dairy product prices would drop back next year, are now increasingly picking farmgate returns to stay high into 2023.
ANZ agricultural economist Susan Kilsby has hiked her forecast for the farmgate milk price in 2022-23 season (starting in June 2022) to 9.30 per kilogram of milk solids from just $8.40 previously. And she's also lifted her forecast for the current season to a now market-leading $9.70.
Giant dairy co-operative Fonterra recently pushed its forecast Farmgate Milk Price range up to $9.30-$9.90 per kilogram of milk solids, giving a 'midpoint' price (at which advance payments to farmers are made) of $9.60. The current record high price for a season is the $8.40 that was paid in 2014, so whatever happens between now and the end of the season this year's payment will smash that record.
Arguably the bigger news though is that the current super-high dairy prices are now being seen as likely to stay with us for longer - hence the thought that next year's payout could be a bumper one too.
"...We expect milk prices to remain at elevated levels next season," Kilsby said.
"We expect dairy commodity prices to remain at high levels at the beginning of the season but think it is unlikely prices will stay at such lofty levels as the season wears on."
Kilsby said global risks were "highly elevated" at present, which is driving uncertainty.
"The Ukraine situation is adding fuel to what is already an overheated commodity market. Oil prices have skyrocketed but continue to seesaw on headlines on how the war is progressing. Energy commodities were in tight supply before the invasion and the supply situation is now at least a lot less certain. High gas prices are pushing up fertiliser prices, which in turn is pushing up the prices of grain and food in general. The cost of producing milk is rising, particularly in the Northern Hemisphere, where indoor farming systems mean much greater exposure to high prices for fertiliser, grain and fuel."
The lift in the price of producing milk had already resulted in a reduction in production in some of the main dairy-exporting regions, including the United States, Kilsby said.
"It now seems very unlikely that there will be a meaningful increase in production anywhere in the world over the next six months. This eliminates much of the downside risk for dairy commodity prices in the short-term."
However, dairy commodity export prices are nearing record levels and when expensive freight is added into the equation, combined with relatively subdued economic conditions, "it appears only a matter of time" before there is some reduction in dairy demand.
"At this point it does look like we will be commencing the 2022-23 season with dairy commodity prices at a very strong level. It is debatable how long prices will hold at such elevated levels but there is certainly nothing obvious on the horizon to derail prices immediately. But we are operating in a highly unusual environment where economic risks are certainly high and markets are not always behaving as they have in the past."
In summary, Kilsby said the farmgate milk prices for this season is now certainly going to be a record price.
"Returns are also expected to remain elevated next season, but there is a much higher degree of risk in next season’s milk price. Not just because it is a whole season later, but also because of the global uncertainty we are seeing at present. Additionally, while high milk prices are generating higher income levels costs are also rising rapidly – particularly fertiliser, labour and feed costs."
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