Amy Castleton

Dairy commodity prices have continued to move upwards over the past month, and a milk price of more than $7/kg milksolids (MS) is looking reasonably certain. At the end of October, Fonterra lifted its milk price to a range of $6.55-$7.55/kg MS, with the midpoint of the range effectively the working milk price that the dividend and advance rates are based on.

The NZX milk price was $7.41/kg MS at the time of writing, as was the September 2020 milk price futures contract on the NZX Dairy Derivatives market.

At this stage, commodity prices are expected to continue lifting and then flatten as we reach the end of Q1 2020. There is some downside risk if global milk production picks up more than anticipated, but for now it appears there is more upside pressure than downside pressure.

Whole milk powder prices are well over US$3000/ tonne and are expected to stay there. Skim milk powder (SMP) prices are at their highest level since early 2015 – prior to European milk quotas being removed – and the NZX Dairy Derivatives market has Oceania SMP prices reaching US$3000/t by early 2020. Butter and anhydrous milkfat are considerably more lacklustre. However, neither commodity is exactly low-priced – they are just not achieving the exceptionally high prices we’ve seen in recent years.

Global milk supplies have been lifting and were a bit higher than expected in recent months. US milk was up 1.3% year on year in September, its highest growth rate all year. European production was up 0.8% year on year in August, also higher than it has been in recent months. Europe may continue to see some higher growth rates, but this is not expected for the US.

The US has been experiencing increased culling activity and numerous smaller farms exiting the industry altogether, so there is a smaller dairy herd. In addition, late planting and a poor growing season means there is not a lot of winter feed available. So ongoing high growth rates are unlikely.

To no-one’s surprise, Australian milk supplies continue to fall with little reprieve on the horizon. Conditions are still very dry, and even when they do finally improve, it will take quite some time for the dairy industry to recover.

A warm dry summer is on the cards, so nothing will change any time soon.

Here in NZ weather is starting to have some impact. Pasture growth conditions have mostly been pretty average at the national level this season. However, conditions have dropped sharply and look likely to continue to deteriorate.

NZX’s Pasture Growth Index has conditions tracking at the bottom of historical averages. We expect October production to be reasonably average – though this is likely to be down on last October’s record-breaking production as spring has not been quite as good as it was in 2018. Furthermore, Waikato has been getting dry and the lower South Island has been getting wet – both likely to push milk production forecasts down.

So NZ might see a slightly worse season than we had been expecting. But this will support commodity prices and thus the milk price.