Global dairy price warning, despite auction lift

Prices bounced back on Tuesday night's Global Dairy Trade auction, but analysts remain cautious about future prices.

Rabobank's global dairy strategist Mary Ledman said in the medium term, the prolonged impact from lower foodservice sales, the seasonal peak in northern hemisphere milk production and a significant slowdown in global trade would contribute to rising stock levels, putting downward pressure on dairy commodity prices and farmgate milk prices.

"In the longer term, the third wave includes a likely global recession and widespread loss of income and savings, among other factors, that could keep dairy product prices and farmgate milk prices under pressure into 2021," she said.

The bank's Australian senior dairy analyst Michael Harvey warned Australian farmers to budget for more conservative opening prices.

Rabobank's Australian Dairy Seasonal Outlook report said although the Australian industry had been buoyant thanks to recent record-high milk prices and export returns, COVID-19 was hitting global demand.

A more cautious approach to southern export milk prices was necessary, particularly considering a global market down cycle similar to that of the global financial crisis was now plausible, Mr Harvey said.

"Around the world, in major dairy markets, demand will inevitably fall as unemployment rises and discretionary spending slows," he said.

Under the worst-case scenario, demand would significantly weaken, supply inventories would build up and dairy commodity prices, particularly in Europe, could fall 10-15 per cent on April 2020 levels.

Under this scenario, the report predicts the commodity farmgate milk price for 2020/21 across Australia's southern export region might sit at $5.20 a kilogram milk solids.

But Mr Harvey said the low Australian dollar would boost export returns while domestic market premiums could help bolster farmgate returns.

"The Australian dollar is likely to be lower than it was during the global financial crisis, an almost unprecedented fall that will be a game-changer for the Australian export sector, helping support farmgate returns in 2020/21 and proving key to preserving farmgate milk prices above breakeven levels," he said.

Mr Harvey said the ongoing battle for milk supply would also ensure there were premiums above the commodity mix on offer in the market.

Some dairy farm businesses were also insulated from the global market downturn due to contractual supply arrangements and/or exposure to domestic consumer markets.

He said Rabobank's base case scenario, taking into account these factors, for an annualised southern export milk price in 2020/21 stood at $5.70/kgMS.

Dairy prices were up 1.2pc in Tuesday's GDT auction, the first rise in four auctions, led by whole milk powder prices, which were up 2.1pc and butter prices, which were up 4.5pc.

Westpac New Zealand senior economist Michael Gordon said the results were surprisingly positive, against the backdrop of a severely weakened global economy.

The bank has revised down its forecast NZ farmgate price for this season to $7/kg MS, down from NZ$7.20/kg MS, and has cut its forecast for the 2020/21 season to NZ$6.30/kg MS, down from NZ$7.30/kg MS.

"The margin of uncertainty is always wide for a forecast that far ahead, but we'd emphasise that the outlook is unusually uncertain at the moment," Mr Gordon said.

"We can be sure that the near-term hit to global demand will be unprecedented; what we don't know is how long the lockdown period will last, or how quickly the recovery will play out.

"While the recent stability in prices is encouraging, we still think that the dairy sector still has a long hard road ahead of it.

"We expect further price declines over the next few months.

"Global demand for dairy products, particularly outside of China, will be hit hard by the lockdown.

"The impact will undoubtedly vary across products - for instance, infant formula could be considered an 'essential' purchase, but that's less true of the various processed foods that use milk powder or butter as an ingredient.

"Demand from foodservices has been especially hard hit as cafes, restaurants and bakeries have been shut down."

NZ bank ASB's senior rural economist Nathan Penny said the jury was still out on prices, pointing to the large seasonal reduction of quantities offered on Tuesday night.

"We argue that the overnight lift was most likely due to the seasonal decline in volumes on top of the recent drought rather than any potential stabilisation of global dairy demand," he said.

It has also revised down its forecast for season 2020/21 to NZ$6.50/kg MS.

Mr Penny said dairy prices in US dollar terms remain materially lower than before the COVID-19 outbreak.

Ms Ledman said the global dairy sector was in uncharted territory.

The sector was expected to experience three waves of market movement in the next 12 months before it returned to a 'new' normal.

"The first wave is characterised by a spike in domestic dairy demand driven by panic-buying during the first month of reduced mobility," she said.

"Retail demand will offset a larger portion of declining foodservice demand.

"The second wave is characterised by more muted retail demand and increased logistical and financial challenges.

"Consumers are expected to return to stores on an as-needed basis to fill gaps in their pantries and refrigerators rather than large shopping occasions."

Without government assistance, dairy companies would max out processing capacity, storage availability and credit terms.

The third was global recession.

READ MARY LEDMAN'S FULL REPORT BELOW:

Ms Ledman said a deep recession could see greater use of nutrient-rich dairy products by government-aided feeding programs.

The bank has adjusted its latest global dairy commodity outlook (see Table 1 in report above) but warns, given the magnitude of market disruption, current forecast were often outdated before they were published.

The disruption is hitting particularly hard in the northern hemisphere as it heads to peak seasonal production.

"Increased milk-dumping, plant closings and force majeure are reported in Europe and the US," the report said.

"Dairy processors in France, Italy, and the US have asked producers to reduce milk deliveries by up to 5pc."

Dairy farmers, particularly those in intensive housed systems, may face potential limited supply of supplements and other veterinarian-related products due to manufacturing issues in China, which is a significant producer of these products.

"Similarly, feed quality and quantity could be impacted as nearly 80pc of active ingredients for crop protection products are made in China," the report said.

"As a result, there is a risk to the quantity and quality of feed, which could lead to lower milk production growth and higher costs of production for farmers."

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