Economists have been taking the scissors to their milk price forecasts after what one described as a "terrible" dairy auction in the early hours of Wednesday.
The latest GlobalDairyTrade auction saw overall prices slump 7.4%, while the key Whole Milk Powder (WMP) price fared even worse with a 10.9% plunge.
This came on top of what has been a series of weak auction results with overall prices now down nearly 20% since the start of this year and down by over 45% from the peak levels seen in early 2022.
The giant dairy co-operative (Fonterra) recently lopped, in effect, $1 per kilogram of milk solids off its forecast milk price for farmers this season - reducing the 'midpoint' price of its forecast to just $7kgMS. Fonterra forecast a range of $6.25 - $7.75 for the price.
It has been estimated in the marketplace that this cut represents a reduction in dairy industry revenue of around $2 billion. And that was all before what happened on Wednesday.
ASB economist Nat Keall (he described the overnight auction results as "terrible") had for a long time the lowest milk price forecast for this season among major bank economists and he's down there again now, having slashed his farmgate milk price forecast from $7.25 to $6.60. But close behind is BNZ senior economist Doug Steel, who has slashed his forecast from $7.60 to $6.70.
In a Dairy Update Keall says the latest dairy auction result means overall dairy prices are now at their lowest point since late 2018, while WMP prices are at their lowest point since this time in 2016.
"We’ve been among the most bearish forecasters this season, but dairy prices have fallen further and faster than even we had anticipated," he said.
Keall noted that Chinese dairy demand "remains soft". Purchases have ticked up a little over the last couple of auctions – perhaps a bit of bargain hunting – but ‘North Asia’ is still buying quantities well below historical averages.
"With the Chinese economy continuing to deteriorate – data yesterday saw big downside surprises in retail sales and industrial production – dairy consumption is unlikely to dramatically improve in the medium term," he said.
"There is plenty of uncertainty at this stage in the season, and there are some upside risks as well as downside ones. Nonetheless, we think it is prudent for farmers to be budgeting on a milk price in the lower half of Fonterra’s present guidance range."
Westpac senior agri economist Nathan Penny - who left his forecast unchanged at $7.50, but who has twice trimmed it very recently - said in a Westpac Dairy Update that when when the Westpac economists revised down their 2023/24 milk price forecast to $7.50/ kg last week, "we had expected prices to continue to fall in the short term. Recall that global demand is weak, notably from our key market in China".
"However, the fall overnight was larger than we had expected. And while it is difficult to read too much into one auction result, it does point to prices potentially falling by more than our updated forecast suggests."
BNZ's Steel said in an Economy Watch note that "one small saving grace" is that the New Zealand dollar has pushed below US60c, at least taking the edge off the product price falls when expressed in local currency.
"We judge the GDT price index in NZ dollar terms fell 3.4% overnight and is down 20% on a year earlier. If the currency stays lower, it will help provide some support for milk prices this season and, more so, next season. But, to date, the NZD is not enough to offset the downward pressure on domestic milk price calculations from lower product prices."
Dairy prices
Select chart tabs
24 Comments
A double whammy on its way for Fonterra suppliers.
Price per kg ms sharply lower.
But also farmers can't afford fertilizer, supplements and crops so farm production about to fall making Fonterra stainless steel a less efficient manufacturer.
Fonterra already reacting, today removing restrictions on PKE use.
Where are all the "Chinese trade is our future" people now? Given the state of the Chinese economy and political attitudes, our Chinese trade may never recover and fade away. That is unless we end in up in conflict with them in which case it will disappear over night.
Our options do not look that great. Our so call friend and ally, the USA, do not want to support us with fair trade and if push came to shove would totally screw us. Note, I do not think that anybody has ever really benefited from a free trade deal with the USA. Australia, Mexico? Who else has been sucked in? Our next best friend Australia is even more dependent on China, so we can expect them to fade as trade partners.
What is the counterfactual? Totally throw our lot in with China and the BRICs? God help us.
I mean that's the price you pay to allow yourselves to be able to call on the US to fix your security problems when they should arise .The NZ Taxpayer is not sending money to refit and refuel USPACFLT - but I guarantee you NZ be screaming for help when the Chinese start getting a little more interested in your offshore fishing zones .
Given the last time that Dairy Farming faced serious challenges in regads milk price some questions were raised around banks exposure to Dairy industry and RB were watching very closely.
With this price and then facing inflated costs in regards fuel, Fertilizer - assume some Farms will become very marginal and accordingly if low prices for an extended period how long before RBNZ will be checking on Banks Loan Books?
I was going through old farm sales records in our area. Good dairy farms, good location. contour, soils, infrastructure
Last season A grade dairy farms sold for around ten percent higher than FIFTEEN years ago on a per kg ms basis.
Increased dairy farm prices have come from increased production per ha, lifting the per ha price.
So increases in farm prices have been income (production) led which is no different than most industries.
But is that increased production actually profitable. Easy to put in in-shed meal feeders and increase production, per cow and per ha. Another thing entirely to make a profit from it and pay for the extra capital . A lot of farms would be far better pushing once a day low cost. Family member sold their herd last season, good timing, had got the herd to 330/ cow OAD, never below 300, damn profitable and better than most local twice a day pke feeders.
Redcows - Understand what you are saying. We are constantly tweaking our business looking for the best bottom line while improving the farm.
Just got sick of all the haters on this site that waffle endlessly about farmers and their tax free capital gains when values have largely increased because of increased production. .
With you Wilco, farming animals is a totally different prospect to farming people in house rentals. Many expect farmers to just keep producing "cheap food" for the general population.
Farming is a long term proposition that requires a lot of dedication wether the farming involves livestock, crops or any form of horticulture.
Food production in general is a hard game. If there is a capital gain after half a century, good on them.
First dairy, now Kiwifruit. https://www.zerohedge.com/political/fruit-potentially-deadly-bacteria-r…
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.