With flat production overseas, and strong production in New Zealand, milk prices are expected to stay strong, NZX analyst Amy Castleton reports.

Fonterra confirmed its 2018-19 milk price last month at $6.35/kg milksolids (MS). It has increased its forecast for the 2019/2020 season to $6.55-7.55/kg MS. Fonterra also confirmed its loss for last financial year at $605 million, and announced its new strategy.

The co-op intends to focus on New Zealand and adding value, rather than chasing volume. Fonterra also said it will rationalise its offshore milk pools – though hasn’t yet provided much detail.

At this stage, a strong milk price for 2019-20 is looking very likely. Dairy commodity prices have been relatively stable and are not expected to change substantially in the short term. Milk production has continued to be flat to falling in nearly all major milk-producing regions, and little change is expected any time soon – which will continue to support commodity prices.

NZ milk production has been strong for the season so far (up 3.8% season to August), though whether this will continue is the question on everyone’s minds. Most regions are in reasonable shape with good pasture cover. However last October was a record month and will be difficult to beat.

Production through the remainder of the season will be highly weather-dependent. NIWA is forecasting some drier than normal conditions ahead, which may influence production. However, if NZ production is weaker than expected, this will be supportive for commodity prices.

Both United States and European milk production continue to track flat against year-ago levels. US production was up just 0.2% year on year in August, while European production lifted 0.6% year on year in July (full August data is yet to be published). European production is expected to increase its growth rate over the next few months, but more because of weak production a year ago rather than anything driving a significant increase this year.

All in all, no significant shifts are expected in global milk production, so we are unlikely to see much change in dairy commodity prices either.

At the October Global Dairy Trade (GDT) events we saw a 0.2% lift and then a 0.5% lift. Whole milk powder (WMP) pricing was steady at the October 15 GDT event, with prices virtually unchanged across all contract periods. Pricing on the NZX Dairy Derivatives market has been similar, with a very flat forward curve being illustrated for quite some time now. At the time of writing, the derivatives market had WMP prices close to US$3200/tonne for most of the rest of the season.

Flat forward curves have really been the case across the board. Through to April, skim milk powder futures are largely at US$2700/t, anhydrous milkfat futures at US$5000/t and butter futures at US$4050/t. The market is effectively saying ‘no change expected for the immediate future’. Until something happens on either the supply or demand side of the equation, we are unlikely to see much more than tweaks in commodity pricing.

  • Amy Castleton is NZX senior dairy analyst.