Words by: Amy Castleton

Dairy has continued to perform exceptionally well as we start the new year. Lower Oceania milk production and steady demand are keeping prices up for now, but as always in dairy, there are headwinds and one wonders how long the high prices will last.

Global Dairy Trade (GDT) results continue to blow prior expectations out of the water, with both January events seeing some exceptional results. Prices were up 4.8% at the January 19 GDT. Milk fats have tended to drive the rises, though prices have also lifted for milk powders. Pricing for some commodities is at its highest level in at least five years. This is great news for milk prices, particularly if the high commodity prices continue. It is looking fairly likely that there will be a milk price of at least $7/kg MS this season.

New Zealand milk production fell 2.7% year-on-year on a milksolids basis in November, largely driven by the dry conditions we saw in October and early November. NZX expects production to improve for the next few months because since then we have seen pasture growth improve.

There is plenty more grass around, though quality has tended to suffer. The volume of grass should help to keep milk production up. The NZX milk production forecast is now 0.5% growth for the full New Zealand dairy season, with December and January milk production figures expected to be flat to slightly up on last season. At the time of writing we are starting to see some drought in the north of the country. These conditions – particularly if they become more widespread, and especially through Waikato, could affect milk production again this season.

Australian milk production has also been weaker than expected, with October down 0.3% year-on-year and November flat against November 2019. The weaker figures are a result of the dairy herd still rebuilding after the extensive culling that occurred through the recent drought and labour shortages caused by the pandemic. Conditions and input prices remain much better than they have been in recent years.

Demand for dairy commodities has been fairly steady, though largely driven by China, to a greater extent than usual. The depreciation of the US dollar against most currencies has contributed, along with high prices for domestically produced Chinese product. The fact that NZ milk production has been low will also be helping, with many Chinese consumers preferring New Zealand product. These factors have pushed commodity prices higher through December and January. However China is experiencing another surge in Covid cases, which has some commentators worried that Chinese demand will fall.

There are also the lockdowns in the US and Europe and economies continue to struggle with the impacts of the pandemic. No further impact on demand for dairy has been observed yet, but there is the potential for demand for some dairy products to ease.

Another headwind for prices is Northern Hemisphere milk production. US production has been growing exponentially for several months. European production has also been growing, albeit at a slower rate than the US. We’re currently in a time of year where the market is more focused on the Southern Hemisphere, but the extra milk is likely to have more effect on the market as we head closer to the Northern Hemisphere’s peak.

When the extra milk will have an impact and whether dairy demand drops is the question, but until then we remain in a good sector, with high prices and the likelihood of another high milk price this season.

  • Amy Castleton, senior dairy analyst at NZX Agri.