World milk prices are poised for a “slow recovery” this year, National Australia Bank said, even as dairy giant Fonterra said that output in the key New Zealand market was continuing to fall below the expected full-year rate.
National Australia Bank, flagging a forecast from the US Department of Agriculture that Chinese whole milk powder imports will rise by 14.3% in calendar 2016, forecast better conditions this year than in a “tumultuous” 2015, when “lacklustre demand” and ample supplies sent “prices on a rollercoaster”.
This year, “we see a slow recovery in global prices, with moderately higher Chinese demand, but continued strength in global supply”, NAB said.
In Australia itself, dairy values, as measured by export values, will rise by 3.0% in Australian dollar terms, helped by a marginal decline in the currency against the US dollar.
The forecast came even as Fonterra – which processes the vast majority of milk in New Zealand, the top exporting country – said that its collections last month were, at 195.6m kilogrammes of milk solids, down 2.8% year on year.
The co-operative flagged a “low milk price environment, where farmers have reduced stocking rates and supplementary feeding in order to reduce costs”.
The fall left the rate of decline so far this season, which began in June, at 4.1%.
However, that remains well below the rate of decrease of 6% that Fonterra has forecast for 2015-16, and which would, in indicating less ample supplies, imply more support for prices.
And the peak period for New Zealand production has now past, meaning steep drops in output will be needed for the rest of the season to bring the pace of decline back to Fonterra’s projections.
Indeed, some commentators believe that Fonterra will prove unable to meet a forecast that it will pay its farmers NZ$4.60 per kilogramme of milk solids for milk for the season, up from the eight-year low of NZ$4.40 per kilogramme of milk solids paid in 2014-15.
Australia & New Zealand Bank forecast a retreat in Fonterra’s milk price to around the “bottom end” of a range of $4.25-4.50 per kilogramme of milk solids the bank has previously guided to.
For the season to date, prices indicate a level “around the low-$4 per kilogramme of milk solids mark”.
The bank also flagged “murmurings out of China of significant raw milk pricing reductions and [downward] renegotiations of farmer supply contracts by domestic processors.
“In Europe, the Dutch co-operative FrieslandCampina has been so overwhelmed by the increase in milk from farmers it has run into capacity constraints, and has offered a bonus to suppliers to stay below a certain volume of milk.”
Open Country downgrade
Talk of a drop in Fonterra milk prices has also gained momentum with a downgrade last week by Open Country Dairy, New Zealand’s second largest dairy processor, to the estimate of the payout rate for its farmers.
Open Country dropped its forecast by NZ$0.30 to NZ$4.00-4.30 per kilogramme of milk solids, citing weakness at GlobalDairyTrade, the twice-monthly physical dairy auctions run by Fonterra.