Global dairy volatility easing as production constraints hit: NZ analyst

This means global prices are moving to a higher plateau, ASB senior rural economist Nathan Penny said.

ASB lifted its forecast NZ 2019/20 milk price by NZ$0.50 to NZ$7.50 a kilogram milk solids on Wednesday, following another lift in the Global Dairy Trade auction on Tuesday night.

The bank also set its initial 2020/21 forecast price at NZ$7.50/kg MS and lifted its long-run forecast range to NZ$6.50-NZ$7.50/kg MS.

The GDT price index was up 1.7 per cent on Tuesday, the fifth consecutive rise.

The key whole milk powder index was up 2.2pc to US$3321 a tonne, its highest level since December 2016, while skim milk powder prices hit a five-year high, cracking the US$3000 for the first time since August 2014.

Westpac has also lifted its NZ price forecasts - up to NZ$7.10/kg MS for 2019/20 and to NZ$7.30/kg for 2020/21.

But its head of NZ strategy Imre Speizer sounded a word of warning.

"We've maintained our cautious view on the strength of the Chinese consumer going forward, and these forecasts allow for a modest pullback in world dairy prices over the first half of 2020," he said.

Both analysts pointed to a 1.5pc drop in NZ production in October as a key factor in the market lift.

"October is the largest milk production month, closely followed by November and December, which means there's little chance of domestic supply rising significantly in the near term given lagged weather impacts," Mr Speizer said.

Mr Penny also pointed to soft production in the northern hemisphere with growth only marginal in both the European Union and the United States.

"In short, production growth in the key dairy exporters is insufficient to meet growth in global demand," he said.

Mr Penny said almost as important as their bullish milk price outlook was the observation that milk price volatility had fallen.

"Indeed, we believe that the fall in milk price volatility is structural in nature," he said.

"In that sense, the farmgate milk price is moving to a higher plateau."

The real milk price had tracked close to the 10-year median throughout 2017-2019, while the five-year average standard deviation of milk price had fallen by about a third since the start of 2018.

"These data support our view that global dairy markets have settled since the super cycle of 2013-2016," Mr Penny said.

The key reason was that global production growth was moderating as all producers ran into constraints.

Environmental and regulatory constraints meant maximum sustainable nutrient levels had been reached in many regions and countries.

Capital was also constrained, particularly in NZ where banks had tightened access to credit following the Reserve Bank New Zealand's changed capital requirements.

Mr Penny said dairy was also facing increased competition for resources, both from other agricultural sectors, such sheep, beef, horticulture and forestry, where returns had lifted, and from other sectors for land and water, including for urban housing, tourism, recreation and conservation.

These were limiting production growth with NZ a case in point, as growth had stagnated since 2015, after more than a decade of an average annual 5pc lift.

"As a result, we believe that constrained production growth will translate into smaller amplitude in both the production and milk price cycles over coming seasons," Mr Penny said.

"Other cyclical factors such as drought, swings in dairy stocks and biosecurity scares will remain in play, but the constraints on dairy producers to 'overshoot' the market are likely to be the key factor driving the structural reduction in volatility."

The bullish outlook is also apparent in Australian dairy export prices.

Analyst Fresh Agenda's dairy export index increased this week - on the back of stronger commodity prices and a weaker Australian dollar.

Its index lifted by 7.2 points to 225.2 - the highest point in 24 weeks.

"Since January 2000, the index has only been higher than this level only 4.5pc of the time - that's 46 weeks out of more than 1030," Fresh Agenda reported.

Fresh Agenda's weekly spot commodity milk value for southern Australian dairy manufacturers rose 29 cents to A$6.66/kg MS.

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