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Christel Yardley / Stuff
Strong demand for dairy products from China and Asia has outstripped supply, causing prices to skyrocket, according to Nathan Penny, an agricultural economist at Westpac.
Waikato farmer Ben Moore had to wipe the sleep from his eyes when he woke up to read the figures for the latest global dairy trade auction on Wednesday morning.
Dairy prices rose 15 percent overnight, driven by demand for whole milk powder and butter before the season ends.
Moore leases 100 hectares and owns another 45 in Okoroire, near Matamata. The farm milks 450 cows.
He is also the vice president of Waikato Federated Farmers and said that every positive auction was good news.
“But I would not go out and buy a Range Rover today, because who knows what will happen next with the Covid-19 still available.
“Nor would I be betting on a higher payment because Fonterra, over the last year, has been very conservative, which is a good thing,” he said.
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Strong demand for dairy products from China and Asia had outstripped supply, causing prices to skyrocket, said Westpac agricultural economist Nathan Penny.
The price of whole milk rose 21%, butter 13.7% and anhydrous milk fat 7.4%.
There were eight consecutive increases in the global dairy auction with the last seven mainly due to underlying strength in demand, he said.
But last night’s exchange was a reflection of New Zealand history.
“What we have seen overnight is just the understanding from the markets that the New Zealand season is coming to an end and there is not going to be a lot of milk. So we are getting a temporary spike in addition to the underlying strength, ”Penny said.
The New Zealand season was coming to an end and markets knew that supply would not catch up with growing demand until spring.
Price strength was not limited to dairy products. Due to Covid-19, markets wanted to have additional food stocks in case of new outbreaks, he said.
New Zealand is the largest supplier of whole milk powder and milk fat.
That’s why skimmed milk powder increased by just 3 percent, as the milk season in the United States and Europe was starting and could supply it for the next three months.
Westpac raised its on-farm milk price forecast by 40 cents to $ 7.90 per kilogram of dairy solids, while ANZ revised its forecast up 50c to $ 7.70.
Fonterra said it was still “running the numbers” on the price of milk at the farm, in a statement sent to the NZX.
Chief Executive Officer Miles Hurrell said the dairy giant was speaking with sales teams in foreign markets to learn more. There were other factors to consider, including the seasonal calendar, currency exchange rates, and the ongoing impact of Covid-19.
Another factor in the “extraordinary” price jump was the reliability of New Zealand’s supply chains vis-à-vis other markets, which meant that buyers were confident that they would receive the products, he said.
Moore’s advice was to follow Fonterra’s lead and be conservative with planning ahead.
“We set our budget for the year, and everything else we do goes to pay off the debt.”
Emma Higgins, a senior dairy analyst at RaboResearch, said that producing milk in China was expensive as corn and soybean prices had hit multi-year highs, and it was reflected in Chinese milk prices, which were just below below all-time highs last seen in 2014.
Factors such as the end of the season in the southern hemisphere, lower production forecasts in the northern hemisphere, port congestion and delays in customs controls at the Chinese border made demand for dairy understandable, but could mean there would be more volatility in the future.
“Better buckle up,” he said.
