Following Fonterra’s modification of the farmgate milk price prediction earlier today, RaboResearch Senior Agricultural Analyst Emma Higgins provides analysis below.
The farmgate milk price forecast has been drastically revised. Fonterra has reduced its prior midpoint of $8.00/kgMS by $1.00/kgMS, with a new midpoint of $7.00/kgMS for the current 2023/24 milk production season. The new milk price estimate range is $6.25/kgMS to $7.75/kgMS.
Before dawn, it is always the darkest.
Dairy commodity prices are currently lower than 5-year norms after this week’s GDT auction. This is a big movement in dairy commodity price, which has been occurring since the second quarter of last year. It will be difficult for individuals who are going through this moment of transition.
Costs have risen 13% year on year. The agricultural price expenditure index for Q1 2023 reveals that total input prices increased 13% year on year (Q1 23 vs. Q1 22). Interest rates are the greatest movers (+50% year on year), followed by fertilizer (+11% year on year), dairy shed expenditures (+11%) year on year, and insurance premiums (+9% year on year). At the same time, Fonterra’s farmgate projection mid-point fell 11% year on year.
Fonterra’s newest farmgate predicted mid-point (August 2023) is 24% lower than the same time in 2022.
The drop is primarily due to decreasing import demand from China, which is now experiencing a milk boom that has been building for many years. Production growth is moderating, which is what markets want for rebalancing, but the pace of increase in the first half of 2023 has surpassed our expectations. Milk supply increased 7.5% year on year in the first half of 2023, with a slowing in Q2 compared to Q1.
The dairy commodities markets are going through another cycle.
The markets are now sluggish and tough. However, we do not believe that this is a super-cycle slump.
For comparison, during the dairy slump (seasons 2014/15 – 2015/16), the milk price fell from $8.40/kgMS (2013/14) to $4.40/kgMS (2014/15). When adjusted for inflation, it equates to the milk price in today’s terms falling from over $10.60/kgMS to $5.50/kgMS.
There are some signs of hope for pricing out there.
The triggers for a rebalancing inside China are in action, as indicated in our recent Agri Monthly report (attached). Milk prices are falling, cost pressures are increasing, and farm growth is stalling. China is reopening, but demand settings remain weak and unpredictable.
RaboResearch argues that inventory levels in dairy markets are low outside of China. This is a significant departure from the Dairy Downturn era, when certain dairy commodity prices, notably SMP, were under pressure for a prolonged length of time because to EU intervention inventories. Another significant distinction between the Dairy Downturn and this time is that the supply picture is considerably more modest. Whether it’s pricing pressure in the US, weather concerns in parts of the EU, or even El Nino dangers in the future, the challenge for milk supply growth from key exporting nations is evident.
In the future, New Zealand milk production will need consistent weather. Budgets will not appreciate spring storms or anything going wrong in the closing months of winter.
Rabobank is presently working on its third quarter dairy quarterly report, which will contain an updated milk price estimate. This is scheduled to be published in early September.
