Words by: Amy Castleton

Fonterra lifted its milk price forecast for the 2020-21 season in mid-October. The revised mid-point is $6.80/kg milksolids (MS), up 40 cents from its previous forecast. The new range is $6.30-$7.30/kg MS.

Fonterra commented that the increase is due to improved demand in China. China has recovered quickly from Covid-19, and its dairy demand has also recovered quickly. Fonterra noted that demand for whole milk powder (WMP) in particular has been stronger from Chinese buyers.

The co-op noted that the demand has been reflected at Global Dairy Trade (GDT), pushing prices upwards in recent events. Demand for milk powders has been especially resilient.

Fonterra said a $6.80 milk price would see more than $10 billion flow into regional New Zealand.

The co-op is keeping an eye on a number of factors, given it’s still early in the season and much can change in the remaining months. These factors are why Fonterra is maintaining its wide forecast range. It noted possible volatility in exchange rates, European Union and United States milk supplies increasing, and uncertainty around potential risk from further waves of Covid-19 and how a global economic slowdown may impact demand.

“With increasing demand and supply, we see the dairy outlook as more balanced, but given there are still a number of risks, we are still recommending our farmers be cautious with their decision making.”

The NZX milk price sits at $7.11/kg MS at the time of writing, well within the revised range, and higher than the mid-point. This forecast is based on GDT results for the season to date and the outlook from the NZX Dairy Derivatives market for the remainder of the season. The Derivatives market expects commodity prices to remain relatively firm for the remainder of the NZ dairy season.

Dairy commodity prices continued to lift through October. Prices were up 2.2% at the October 6 GDT event and lifted another 0.4% at the October 20 event. There has been talk of NZ soils getting dry, which may be providing some of the support to commodity prices.

Recent soil moisture deficit maps from NIWA show the east coast of the country, along with the upper North Island, are especially drier than usual for this time of year. Canterbury and Southland are particularly dry for this time of year. However irrigation in the South Island means dry conditions in this area are less concerning than in the North Island. Parts of the west coast of the North Island – Taranaki, and part of Waikato and Manawatu – are suddenly at field capacity, meaning soils are much wetter than usual for this time of year. However this seems to be due to a sudden burst of rain in mid- October – whether enough rain carries on through the rest of spring is the question.

NZX’s Pasture Growth Index model shows conditions have been below average for much of October. Conditions are forecast to improve back into average territory as we head into November; however the recent dryness may result in some impacts on milk production for October and November. At this stage it looks likely that milk supplies through spring will be closer to 2018 levels than 2019 levels.

Any continued dryness which impacts on milk production will support commodity prices, particularly those for whole milk powder. This will support milk price forecasts.

  • Amy Castleton, senior dairy analyst at NZX Agri.