ANZ economists expect a gradual lift in dairy commodity prices - but not before a large proportion of the new NZ season's supply has already been traded; they have cut their forecast milk price

Global dairy markets have deteriorated "at a quicker pace than anticipated", say ANZ economists - who have cut their forecast for the farmgate milk price this season.

In an NZ Forecast Update publication, ANZ agricultural economist Susan Kilsby said "at this stage" it is not clear when dairy commodity prices will lift "but we have factored in a gradual increase".

"However, most of this won’t occur before a large proportion of the new season’s supply is already traded," she said.

However, milk output remains relatively subdued in most jurisdictions, "which will eventually support higher prices".

Giant dairy co-operative Fonterra has made an opening milk price forecast for the season that started last month of between $7.25-$8.75 per kilogram of milk solids, giving a 'mid-point' price of $8.

Kilsby has dropped her milk price forecast by 50c following this week's GlobalDairyTrade auction results, and now has a price of $7.75 - below the midpoint of Fonterra's own forecast.

She said the current weakness in the NZ dollar is providing some assistance to farmgate pricing, but hasn’t been sufficient to offset the sharper reduction in the price of milk powders and dairy fats such as butter and anhydrous milkfat.

"Dairy commodity prices continue to soften and it is difficult to know exactly for how long prices will recede. Typically, such low prices stimulate demand. There has been a little extra demand from some buying regions recently, but this has been muted, as while prices are still falling buyers tend to hold off, looking to benefit from any further downward movement in pricing.

"Clear signs that pricing has turned are likely to stimulate additional demand, as buyers scramble to secure supplies before prices trend even higher.

"But when this point might arrive remains unclear," she said.

What is clear, however is that consumer demand is being impacted by weaker economic conditions in many regions. Most economies are still growing, albeit at a considerably slower pace than normal, which is taking a toll on dairy demand.

"The softer demand from China is having the largest impact, as China is by far the world’s largest importer of dairy products. This market is expected to remain relatively weak for some time yet, but as milk supplies tighten prices are expected to improve later in the season."

Westpac senior agri economist Nathan Penny, in a Dairy Update publication, also noted that the chief catalyst for the ongoing price decline is the (unexpectedly) sluggish Chinese economy.

"Indeed, we have made significant downward revisions to our forecasts for Chinese economic growth this year."

Penny still has the highest milk price forecast among main bank economists, at $8.90, but says there are now "clear downside risks" to that.

"As a result, our forecast is under review."

In terms of China, Penny said as recently as last month, Westpac economists expected economic growth for 2023 of 6.2%.

"Since then, we have cut the forecast to 5.7%, and this week’s June quarter GDP data indicate further downside risks to that number."

Regarding dairy prices, Penny said looking over a longer period, "the downward price trend is clear and has been sustained much longer than we expected".

"For example, overall prices have fallen at 10 of the 14 auctions held this year. And overall [prices] and WMP [Whole Milk Powder] prices are down 22% and 17% in annual change terms.

"In contrast, we had expected that prices would have bottomed by now, if not begun to turn higher."