Latest global dairy auction results give cause for cautious optimism about the milk price for farmers in the current season, Westpac senior agri economist Nathan Penny says.
Penny is forecasting a price of $6.50 per kilogram of milk solids for the 2020/21 season currently under way.
And he said the results in the latest GlobalDairyTrade auction early on Wednesday morning are "consistent" with Westpac's $6.50/ kg milk price forecast.
"Note in the short term, we have allowed for prices to fall as New Zealand production rises towards its peak, before prices firm again later in the season," he says.
Fonterra's current forecast for the 2020/21 season is in a wide range of $5.90-$6.90. The co-operative is set to announce its full-year results on Friday (September 18) at which time it will confirm what the final price is for the season recently concluded. The most recent update Fonterra gave on that was to narrow the range for the 2019/20 price to $7.10-$7.20.
Westpac's Penny says it’s still early days in the current production season, and the uncertainties around the Covid impact through the full dairy season remain large.
"On this basis, we recommend that farmers approach the season with ‘eyes wide open’ and continue to closely follow dairy market developments," he says.
Commenting on the latest auction results, Penny said the result reversed some of the "cumulative fall" over the August and the first September auction. He noted that Whole Milk Powder (WMP) prices now sit 8.5% below their recent peak in July, while overall prices are around 4% below.
"Looking back to the pre-Covid levels, WMP and overall prices are 6.8% and 10.4% lower, respectively."
He said a pattern of price falls followed by prices rises "is in line with what we have been expecting".
"Covid outbreaks over August and early September put pressure on market confidence and in turn on prices. But as Covid case numbers settle again, confidence has returned to dairy markets, and prices have stabilised once again.
"From here, we expect this pattern to continue. By and large most key dairy markets (notably China) continue to manage Covid well, but outbreaks are likely to occur from time to time. On the flipside, if the virus surges in key markets, then prices are likely to fall below recent ranges."