sign up log in
Want to go ad-free? Find out how, here.

Westpac economists say the milk price in the current season might be the lowest for eight years after adjustment for inflation

Rural News / news
Westpac economists say the milk price in the current season might be the lowest for eight years after adjustment for inflation

The farmgate milk price in the current season might end up being the lowest for eight years after adjusting for inflation, according to Westpac economists.

In an Dairy Update report Westpac senior agri economist Nathan Penny has cut his forecast of the farmgate milk price for the third time in about a month and now sees a price of $6.75 per kilogram of milk solids.

"If achieved, the milk price would be the lowest since the 2018/19 season ($6.35/kg). But more pertinently, it would be the lowest in inflation-adjusted terms since the 2015/16 season ($3.90/kg or circa $4.90/kg in June 2023 dollars)," Penny said.

His latest forecast cut followed on from Fonterra on Friday of last week cutting its official milk price forecast for the second time this month. It now forecasts a range of $6-$7.50, giving a 'midpoint' price of $6.75 - the same as Penny has now settled on.

The latest Fonterra cut followed a dire result at last week's GlobalDairyTrade auction in which overall prices slumped 7.4%, while the key Whole Milk Powder price plummeted 10.9%.

Penny said that if current auction prices were to persist until the end of the season (and assuming 0.61 for the NZD/USD), "the milk price would likely come in towards the bottom end of Fonterra's forecast range".

In terms of the weak Chinese demand driving much of the short term outlook for dairy prices, Penny reiterated that Westpac economists had cut their forecast of China's 2023 economic growth from 6.2% in June, to 5.7%, and then to 5.2%.

"Chinese businesses and households are suffering a crisis of confidence. The housing market remains key to the Chinese economic psyche and any pickup in activity. It remains very weak following the bursting of its speculative bubble and the government’s housing market reforms.

"Officials have begun to incrementally loosen lending policy settings. But further measures are likely necessary. Indeed, we expect additional stimulus, focused on encouraging first home buyers and smaller investors back into the market. At the same time, we expect that Chinese officials will try to strike a balance, kickstarting growth in the economy without undoing the hard-won gains from previous reforms. Too little stimulus and the economy may stall; too much and a speculative bubble may return.

"This delicate balancing act results in clear risks to our forecasts for Chinese growth and in turn Chinese dairy demand. If anything, we suspect that the Chinese government may favour less rather than more stimulus than we have factored in," Penny said.

He reiterated that for many NZ farmers, this season’s milk price is likely to be below their break-even point.

"Indeed, even after taking account of the cost-cutting measures that farmers are likely to take, DairyNZ’s updated breakeven milk price estimate is around $7.50/kg. Note that break-even estimates vary widely by farm (and also in the calculation method), so that some farms may have larger deficits, while some may still even be in surplus."

However, there are some offsets in play, Penny said. The recent payout from the sale of Fonterra’s sale of its Chilean business has added $0.50/kg back into Fonterra farmers’ cashflows at least, if not their farm profits. Also, Fonterra is set to pay "a relatively healthy dividend in October of circa 40 cents per share".

The other potential source of relief is falling on-farm input inflation.

"Annual dairy farm input inflation was running as hot as 17% in the middle of last year. Now as at June 2023, annual input inflation has fallen to 7% - by the end of the year, we expect to fall to the 3% to 4% range. If anything given the pace of declines to date and subsequent feed and fertiliser price reductions, input inflation could be close to flat by the end of 2023," Penny said.

"Those factors aside, the lower milk price is still the dominating factor. Indeed, improvements in farm profit margins are likely to need to wait until the 2024/25 season.

"For this season, it means that for many farmers the focus is likely to be on loss minimisation."

Dairy prices

Select chart tabs

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.


Yup, they close the wallets real quick, and it Will be a hard year for service towns 


Good thing the CH4 tax isn't here yet?


It'll never be here now - we're out of time and too far down the surplus energy retreat.



Yup ,the 9 cents per kg of milk solids would really be a lot worse than the $ 3 drop from the market.


And where would the 9 cents go?


Back to the industry to pay for research.