NZ’s economic outlook is given a lift as dairy prices rise again

Dairy prices have  hit  a  new  peak at  Fonterra’s Global Dairy Trade  auction.  The GDT index shot up 5.1% to an average price of US$5,065 (NZ$7,509). Whole milk powder rose 5.7% to US$4,757 a tonne while cheddar rocketed up 10.9% to $6,394.

Butter prices gained 5.9% to an average US$7086/tonne, anhydrous milk fat 2.1% to US$7048/tonne and butter milk powder firmed 5.8% to US$4217/tonne. Skim milk  powder was  up 4.7% to US$4481/ tonne.

“This train isn’t slowing down,” said NZX dairy insights manager Stuart Davison.

Other  business-sector commentators  see  the  boom in the dairy  sector   injecting  new  strength into  the  economy at a  time  when it is badly  needed, with  other sectors  like international tourism  and  hospitality hard hit  by the Covid pandemic.

Bidding at  the  auction was  fierce, driven by the  tight supply   position,  as well  as  Russia’s war  on Ukraine.

This morning’s gains put still more upward pressure on Fonterra’s farmgate milk price forecast, which has already been heavily revised upwards to record levels.  Some industry  authorities  suggest the payout  to farmers  could  top $10kg/MS if  these  latest rises are sustained,

Fonterra last month lifted its 2021/22 forecast farmgate milk price range to NZ$9.30 – $9.90kg/MS, up from NZ$8.90 – $9.50kg/MS.

This increases the midpoint of the range, at which farmers are paid, by 40 cents to $9.60kg/MS, which would be highest ever paid.

Economists say the latest auction  bodes well for prices next season.

Despite  that prospect, pressure  groups  like  Greenpeace  are  constantly demanding  dairy  farmers  cull  their herd  numbers   because of the urgent need  to  cut methane emissions.

“There are just too many cows”,  says Greenpeace  executive director  Russel Norman.

The Climate Change Commission  has also proposed  herd  numbers  should be  reduced  by 15%.

But doing this would  be  a  heavy  blow  for  a  sector  that  has  provided a  lifeline  to  the  NZ  economy during  the Covid  pandemic.

It  is  expected  Fonterra’s total payout   to  farmer-suppliers   will  top  $14bn  this  season,  and  with  other  dairy  companies making payouts at much the same level ,  it  makes  no  sense to  talk  of  reducing   the dairy industry’s  production.

The  high  payout  means  farmers  have   the  scope  to  invest  in  latest technology   to  lift  output  still  higher, and  cut  methane emissions.

The  Labour  government’s  tardiness  in  opening  the  door for  additional  labour  for  the dairy  farms  has  been  a  brake  this  season   on the industry.

Stuart Davison  is  reported  as  saying that – as  with each of the last three auctions – the latest magnitude of GDT price gain will send everyone back to their milk price calculators.

“To back up three events of 4%-plus GDT price index gains with a 5.1 gain is impressive.

“There is little doubt in my mind that the buy side of the market is now correctly pricing in the lack of milk supply, made very obvious by the multitude of market data points over the last two weeks,” he said.

Davison said there was a strong showing again from all Asian buyers reinforcing the idea that the market remained supported and demand was strong.

African buyers were also “extremely” active, he said.

Rabobank senior agricultural analyst Emma Higgins said the already constrained global milk supply had been further impacted by the tensions between Russia and Ukraine as the countries are big producers of grain and fertiliser.

“These commodities are being swept up in the fighting – either physically or via the results of crippling sanctions on Russia,” she said. “Rabobank anticipates more upside to come for global prices of grain, oil, natural gas and fertiliser over time. The flipside is that we also expect the same for food prices and inflation.”

Higgins said she expected further gains ahead for dairy commodity prices, at least in the short-term.

“Food security concerns for some buyers will be high, supporting demand in the short-term,” she said. “It will be harder to quickly increase milk flows out of the Northern Hemisphere with more feed cost pressure expected as grain prices move higher from already elevated positions.”