Westpac economists have raised their forecasts for the milk price to farmers this year and believe that the current likely record prices can be just about maintained into the next milk season as well.
Dairy giant co-operative Fonterra is forecasting (based on the 'mid-point' of its price range) a farmgate milk price of around $10 per kilogram of milk solids for farmers for the current season, which runs to the end of May.
This would be a record, beating the $9.30 paid in 2022.
But while high-paying seasons have often in the past been followed by a sharp fall-off (for example in 2014 farmers got $8.40, but this was followed by just $4.40 in 2015), Westpac economists are picking a $10 price as their first forecast for the 2025-26 season that will start in June. Fonterra has yet to announce its first forecast for next season.
Westpac senior economist Michael Gordon has just revised up his pick for the current (2024-25) season to $10.30, as well as making that first forecast ($10.00) for next season.
Of the current season, he notes that Chinese buyers have been much more prominent in recent months, with reports that they are needing to restock after letting their inventories run down to extremely low levels.
"Whole milk powder (WMP) has been particularly in demand, as there are few countries other than New Zealand that export it in significant amounts," Gordon says.
He expects world dairy prices to ease over the year ahead as Chinese buying returns "to more normal levels". Gordon said.
"On the supply side, the current high prices provide a strong incentive for the world’s major dairy exporters to ramp up production. However, they may still be constrained by other factors – in particular, how well the US and Europe deal with their respective disease outbreaks (avian flu and bluetongue virus) will have an impact on their herd sizes and hence their output over the next season.
"Overall, we’ve assumed that world prices will be 6% lower on average compared to the current season. However, this is partly offset by a lower expected [$NZ} exchange rate over the season," Gordon said.
He says the NZ dollar has fallen significantly since the US election, and the Trump administration’s policies are likely to mean higher US interest rates and a sustained higher US dollar.
While a second season of farmgate prices at $10/kg or more "sounds extremely optimistic", it’s necessary to look at this in ‘real’ terms, Gordon said.
"The bout of high inflation in the years following the Covid shock means that both consumer prices and farmers’ production costs have taken a permanent step higher.
"In that respect, double-digit milk prices are likely to be a frequent occurrence in the years ahead."
Given that we’re still a few months away from the start of the next season, Gordon says it’s appropriate to place "a wide margin of uncertainty" around Westpac's milk price forecast.
"Global economic conditions, trade policies, and other geopolitical risks mean that both dairy prices and the exchange rate could end up a long way from our forecasts in the year ahead," Gordon said.
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