Milk prices to start recovery later this year, says BNZ

(Agrimoney) – Bank of New Zealand backed ideas of a recovery in world milk prices kicking in later this year, even as it cut its forecast for values over 2015-16 to levels implying deep losses for farmers in the top exporting country.

The bank cut to NZ$3.80 per kilogramme of milk solids, from NZ$4.30 per kilogramme of milk solids, its forecast for New Zealand milk prices in 2015-16, citing broader weakness in commodities besides well-documented sector-specific setbacks such as Russia’s import curbs and large Chinese inventories.

“Recent further weakness in general commodity prices such as oil and a reversal in international grain prices following previous gains supports the view that dairy prices will remain weaker than previously anticipated in the near term,” said the bank, which is owned by National Australia Bank.

“Near -erm indicators are poor” for a dairy industry in which prices have been “under severe downward pressure over recent months as ongoing supply expansion, soft demand and trade embargos weigh”.

Farmers in the red

The downgrade takes the Bank of New Zealand forecast even further below the estimate from Fonterra, which processes the great majority of New Zealand’s milk, of a price of NZ$5.25 per kilogramme of milk solids for 2015-16, which started in June in the country.

Fonterra’s board has been expected to cut the forecast at a meeting on August 7, and with some commentators already fearful of a large downgrade after smaller processor Open Country this week slashed its guidance to NZ$3.65-3.95 per kilogramme of milk solids, from NZ$4.75-4.95.

A payout at the level outlined by the Bank of New Zealand would leave Fonterra farmers facing a further year of declining prices, after receiving a seven-year low of NZ$4.40 per kilogramme of milk solids in 2014-15.

And it would spell large losses for farmers, whose cost of production is pegged by industry group DairyNZ at NZ$5.70 per kilogramme of milk solids.

‘Prices will recover’

However, Bank of New Zealand analyst Doug Steel forecast brighter times ahead, foreseeing that while milk prices will “remain weak near term”, they will “recover over the following 12 months”.

The bank cited factors such as setbacks to production from low prices, as well as from the El Nino, although given that the weather pattern can setback output in New Zealand in particular “it is hardly a good way for [price rises] to occur”, Mr Steel said.

The bank forecast that given low prices milk output in the European Union, the top producer, may see “no major lift”, despite the removal in April of production quotas.

The bank outlined a central milk price forecast for 2016-17 of NZ$5.90 per kilogramme of milk solids, putting farmers back in the black.

USDA forecast

On Friday, the US Department of Agriculture held a forecast of EU milk output of 147.0m tonnes in calendar 2015, up 500,000 tonnes year on year.

The estimate for world output in 2015 was trimmed by 3.0m tonnes to 489.8m tonnes, although still representing a rise of nearly 4.7m tonnes on last year.

“Markets are adjusting as the low product prices are being transmitted to farmers as lower milk prices,” the USDA said.

“Consequently, milk production forecasts for a number of countries have been scaled back.”

‘Anaemic demand’

However, the USDA reduced expectations for world milk imports too in 2015, by 125,000 tonnes to 862,000 tonnes for while milk powder, and by 85,000 tonnes to 1.11m tonnes for skim milk powder.

“The factors that initially precipitated the decline in [milk powder] prices remain present.

“Chinese import for demand for while milk powder remains anaemic, the Russian import ban on dairy products from major producers has been extended to August 2016, and the dollar remains relatively strong.”