Dryness is keeping New Zealand on track for one of its biggest milk output drops in recent history, despite the impetus provided by higher dairy prices – “which look a bit stretched”, Bank of New Zealand said.
New Zealand cow numbers, which latest official data show on the rise, are actually “not as low as they might have been, given the very low milk prices that have prevailed over recent years”, BNZ economist Doug Steel said.
Indeed, the size of the herd “increases the likelihood of a production bounceback” in New Zealand, the top dairy exporting country, whose supplies have as large influence on world prices.
However, while reviving dairy prices – which are up 60% year on year at New Zealand-based GlobalDairyTrade auctions – are “potentially encouraging some additional” milk output in the country, as 2016-17 approaches its final months, weather setbacks are “pushing the other way”.
BNZ flagged the “spreading dry conditions in the north and east of North Island… highlighted by Northland’s drought recently being declared a medium-scale adverse event”.
While some rain relief has arrived this month, latest data from the official National Institute of Water and Atmospheric Research shows soil moisture levels remaining well below typical levels.
The bank forecast New Zealand’s milk output falling by 3-4% this season, potentially matching the drops registered in 2004-05 and 2007-08, which have shown the biggest declines so far this century.
‘Reason for price optimism’
The comments come amid ideas that milk output remains more depressed in some other major producing countries than many commentators had expected, given the recovery in values from 10-year lows reached in 2015.
Indeed, the US-based Milk Producers Council said that “international milk production trends offer reason for optimism” over prices, flagging data showing a 10.7% rise in cow slaughter in the European Union in the first 11 months of 2016.
“The bulk of the increase [in cow slaughter] is likely from dairy,” rather than from the beef sector, the council said, noting particularly the strong rises in the dairy-heavy countries of Ireland and the Netherlands, where slaughter numbers rose by 25% and 27% respectively.
“This [herd] contraction… will likely stave off a quick return to the immense volumes of milk the market had to absorb in the first half of 2016.
“At the same time, financial troubles in Oceania and South America are likely to restrict expansion in those regions.”
‘Prices look a bit stretched’
BNZ agreed that “lingering global supply tightness is expected to continuing offering price support” in dairy markets for now.
However, values nonetheless “look a bit stretched relative to the likes of international grain and oil prices, which may ultimately see dairy prices a touch lower by year’s end”.
The bank forecast farmgate milk prices in New Zealand averaging NZ$6.40 per kilogramme of milk solids for 2016-17, which ends in May, a touch more than the NZ$6.00 which the country’s top processor, Fonterra, is currently offering.
Smaller processor Synlait Milk last week raised its price estimate by NZ$0.25 per kilogramme of milk solids to NZ$6.25, noting the softened world production trend.
“Global dairy production, with the exception of the US, has continued to decrease and followed the trend of previous months,” Synlait Milk chairman Graeme Milne said.