Windfall gain for dairy farmers but lower prices ahead

05-01-2022 | Market trends | News

The low value of the New Zealand dollar against the US dollar is likely to prove a windfall gain for dairy farmers in New Zealand. “Nonetheless, we still expect global dairy prices to gradually fall from their peaks over 2022,” says senior agri economist, Nathan Penny of Westpac.

According to Penny, the recent NZD/USD revision gives a small boost to the current season’s milk price forecast, but a much larger boost next season. “Fonterra hedges its NZD exposure well in advance,” Penny points out. “This means that much of this season’s NZD exposure is already locked and thus the benefit of a lower NZD/USD is small. In contrast, Fonterra has plenty of time to take advantage of the lower NZD/USD for next season.”

View here: Global market prices overview

Westpac has lifted its forecast for the 2022-2023 farmgate milk price by 60 NZ cents (41 US cents) as a result. The bank has also upgraded its 2021-2022 farmgate milk price forecast by 10 NZ cents (7 US cents) to NZ$9.00 (US$6.14) per kg milk solids. This revision puts Westpac’s forecast at the top of Fonterra’s updated forecast range.

Penny expects the currencies in the key export markets of NZ to remain firm against the USD, in contrast to the NZD. “For example, we expect the Chinese yuan to remain flat against the USD over the next 2-3 quarters before it gradually appreciates against the USD from later in 2022. It’s a similar story for other currencies in our other key markets in Southeast Asia.”

Supply rebound

The bank still expects global dairy prices to gradually fall from their peaks over 2022, as global dairy supply rebounds in 2022. “This rebound will prove the main catalyst for the decline in global dairy prices,” Penny explains.

But for the moment it seems the ducks continue to line up for dairy farmers for longer. “That’s not to say there aren’t risks,” Penny emphasises. “We continue to highlight the cost pressures that farmers are facing. Keeping a lid on costs wherever possible will remain key to making the most of this purple milk price patch.”

The Global Dairy Trade (GDT) Index decreased for the first time since 3 August. The index fell on 21 December by 1.5%. This resulted in an average price of US$4,236 per mt, down from US$4,290 per mt on 7 December. Whole milk powder, which strongly influences pay-outs for farmers, dropped 3.3% to $US3,867 a tonne.

Highest average returns

Dairy Australia says in its Situation & Outlook Report that last year proved to be one of the most profitable in recent times as most dairy regions reported their highest average returns since season 2013-2014. This helped improve the health of many farm businesses and several factors, including a generally higher farmgate milk price, are supportive for the season ahead.

Global demand for dairy has improved as more countries re-emerge from lockdowns, at a time when supply is tight. While dairy market dynamics remain supportive, seasonal conditions have created several challenges. Above-average rain, storms and cold fronts in Australia have weighed on per-cow yields, caused flooding in some regions and disrupted harvest proceedings.

View here: Global market prices overview

Additionally, labour shortages present ongoing challenges, Dairy Australia says. And according to a recent paper written by the MD of Red Sky, David Beca, and published in Australasian Agribusiness Perspectives, Australian labour cost per litre was on average 33% higher than in New Zealand and 49% higher than in the US.

On dairy farms in Australia, the expense of labour is the second-largest cost after feed, with all other costs being substantially smaller. Beca compared total Australian labour costs to 5 other countries, namely the US, New Zealand, Argentina, Uruguay and South Africa. When the total labour cost per litre of milk on Australian dairy farms is compared to the other countries over the last 6 years, Australian farms have the highest cost.