Global Dairy Trade auction prices down 2.6 per cent

Prices fell 2.6 per cent on Tuesday night's Global Dairy Trade auction, the third consecutive drop.

Pundits are widely split on the medium-term outlook - with huge variations in the forecast New Zealand farmgate milk price for next season.

Westpac NZ is forecasting a $NZ10 a kilogram milk solids price for 2023/24 while ASB is forecasting a whooping $NZ3/kg MS lower at $NZ7.

Fonterra will release its 2023/24 forecast in May.

READ MORE: Global forces to put pressure on next season farmgate milk prices: processors

Tuesday night's auction saw widespread losses across the commodity groups, led by cheddar, which fell 10.2pc.

Skim milk powder, anhydrous milk fat and butter posted 3.0pc-plus falls, while whole milk powder was down 1.5pc.

Westpac has trimmed its forecast milk price for this 2022/23 season by NZ35 cents to $NZ8.40/kg MS.

Fonterra last week stood by its current forecast price of $NZ$8.20-$8.80/kg MS but ASB says the latest auction will put pressure on the midpoint $NZ8.50/kg MS.

ASB economist Nat Keall said dairy prices had once again underperformed futures market pricing.

"If weak supply has been the theme of global dairy markets for much of the past couple of years, lower demand is now the predominant feature," he said.

"Competition for product just isn't there.

"As we expected, China's return to the GDT party isn't pushing prices higher."

Westpac senior agri economist Nathan Penny said the expected pick up in Chinese dairy demand was taking longer than they had anticipated.

"The Chinese economy has reopened, and as a result we expect economic activity to rebound over 2023," he said.

"After growing at a paltry 3.5pc over 2022, we expect the Chinese economy to grow at around 6pc over 2023.

"Already, we are seeing this impact in some of our export markets.

"Sheepmeat markets have firmed and mutton and lamb flat prices, products popular in China, have jumped over the past few weeks."

Mr Keall said although Chinese demand had increased, demand from other sectors had lessened.

"South-East Asia/Oceania and the Middle East - the regions that have helped bolster prices - are increasingly stepping back," he said.

"We expect this to remain a theme over the course of the next season, with improving Chinese demand offset by weaker dairy consumption elsewhere.

"What's more, with local production strong and dairy stocks still healthy, there's a limit to what Chinese processors will be prepared to pay for now."

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Mr Penny is more upbeat.

"We maintain that it is a matter of when, not if, lifting Chinese demand translates into higher dairy prices," he said.

"China, of course, is New Zealand's largest market and therefore has an oversized impact on global dairy prices."

Mr Keall pointed to growing supply in Europe and in total across the world as having a further dampener on prices.

"Not much has changed in terms of the fundamentals since our last update - with global dairy supply past its lows and softer global growth set to weigh on demand, we don't see prices mounting a dramatic comeback," he said.

Mr Penny acknowledged global dairy supply had picked up a little in the past six months.

United States and European Union production had been about 1pc higher in that period, while NZ production had turned a corner.

"However, looking forward, we expect global dairy production to remain subdued," he said.

"Dairy farmers, like all businesses, are battling high input price inflation.

"And crucially, global feed costs remain very high.

"This should keep a lid on global supply growth, if not lead supply lower once again."

Westpac expects global prices to firm across the rest of this year.

"While the lift will come too late for this season's forecast, it does set up 2023/24 for a bumper milk price," he said.

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