Analysts cut NZ forecast milk price after disastrous Global Dairy Trade result

The price plunge - led by a massive 10.9 per cent fall in whole milk powder (WMP) - puts more pressure on forecast New Zealand farmgate milk prices, which were slashed earlier this month.

Fonterra's decision to increase the quantity of WMP and skim milk powder offered at the auction has weighed heavily on the market.

While Australian farmgate prices are locked in for this season, the pressure of cheaper international prices is starting to hit the domestic market.

The August 15 Global Dairy Trade auction saw the GDT price index plummet 7.4pc.

SMP was down 5.2pc, anhydrous milk fat 5.3pc and butter 3pc.

The only bright spot in the market was cheddar, with the index up 5.8pc.

ASB economist Nat Keall said the fall significantly exceeded the expectation of the markets.

"The market is well supplied in the near-term, and it is difficult to see a catalyst for much strengthening in demand," he said.

The bank has cut its forecast NZ farmgate milk price to $NZ6.60 a kilogram milk solids.

"We've been among the most bearish forecasters this season, but dairy prices have fallen further and faster than even we had anticipated," he said.

Westpac senior agri economist Nathan Penny said WMP prices were now at their lowest point in seven years.

"The catalyst for the price slump was a sudden increase in auction volumes on offer," he said.

On August 13, Fonterra announced an 11.1pc increase in WMP volumes for this auction and 5.6pc increase in auction volumes for the next 12 months.

"It's unclear what's driven the sudden increase in volumes," Mr Penny said.

"Fonterra stated rather unhelpfully that 'these changes are the result of movements in market demand'.

"We speculate that buyers see an opportunity to purchase at lower prices on the auction platform.

"To this end, these buyers may have signalled to Fonterra that they no longer want to buy direct from Fonterra on a contracted basis.

"As a result, Fonterra has had to shift this product that it would have sold on contract to the auction platform.

"One factor supporting this theory was an increase in the number of buyers at this auction, notably from North Asia (read China)."

The glacial recovery in the Chinese economy is behind falling demand from that key market.

Mr Keall said Chinese demand remained soft.

Chinese WMP consumption was still at three-and-a-half year lows, while both production and inventories remained strong.

"With the Chinese economy continuing to deteriorate - data yesterday saw big downside surprises in retail sales and industrial production - dairy consumption is unlikely to dramatically improve in the medium term," he said.

Dairy Australia industry analyst Eliza Redfern said international pressure was still looming large on Australian dairy products.

In her market update for Australian Dairyfarmer, Ms Redfern said while some European and US product prices had increased, improving the competitiveness of Australian exports, several Australian products still held strong premiums in international markets.

Australian analysts FreshAgenda said there were negative trends in Australian exports in the 2022/23 season across most dairy product categories.

They estimated milk solids equivalent shipments were down 20pc last financial year - a far greater decline than local milk production, led by falls in SMP and cheese shipments.

Cheese exports were down 18pc, mostly reflecting weaker sales into China and Hong Kong, south-east Asia and Japan.

Ms Redfern said several Australian dairy products still sat at a significant premium on the global stage, including cheddar.

"Longer term contracts with Japanese buyers have been locked in while spot values continue to ease according to buyer expectations," she said.

SMP and WMP continued to be plagued by a lack of importing from Chinese buyers.

Australian WMP remained firm due to limited product availability while SMP continued to fall, following the trend set by other key exporting regions.

"International pressure also continues to weigh on Australian butter and anhydrous milkfat prices," she said.

Ms Redfern said the pressure of cheaper international product was starting to reach into the Australian domestic market, as the level of imports escalated.

Imports were up 17.3pc in 2022/23.

"For those more exposed to the domestic spot price market and less reliant on longer term contracts, ingredient stocks have reportedly been mounting," she said.

"While this typically would increase the level of product available for export, the large premium over alternative origins means Australian exports are unlikely to see a significant boost.

"As international pressure mounts on both Australian export and domestic dairy products, prices have been forced into an adjustment.

"While global demand remains soft, tightening global milk production conditions may help reduce the level of premium required to buy Australian, potentially regaining the attention of local and international buyers down the line."

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