Milk price drop predicted
An expected softening in milk prices in mid 2014 has bank economists predicting a milk price of around $7/kg milk solids for the 2014-15 season.
This weakened payout is predicted to occur when northern hemisphere production peaks later this year. The resulting extra supply would push prices down, Westpac senior economist Anne Boniface said. The bank had forecast an opening price of $7.10/kg MS for the 2014-15 season.
"We're expecting dairy prices to soften a little bit over the course of 2014 as global supply increases.
"It was still a good price. It's not quite as good as 2013-2014, but not too bad either."
Westpac recently upgraded the forecast from $6.70 because of the continued demand for dairy products.
This price also assumed the gap between milk powder and cheese prices would return to historic normals and was contingent on the New Zealand dollar staying high, she said.
"The New Zealand dollar can do some unusual things and we're forecasting the New Zealand dollar to stay relatively high and that's on the back of what we expect will happen to New Zealand interest rates and the New Zealand economy is performing pretty well."
BNZ economist Doug Steel predicted the payout to drop "somewhere below $7/kg MS", but emphasised many variables could occur before the start of the new season.
"Our best guess is that it falls but we're open to surprises along the way."
He, too, cited increased global milk production as the cause of the price fall. He also questioned if the demand for dairy products, particularly from China would continue.
"The question is whether the Chinese dairy milk supply bounces back from its horrible season last season so that the demand for imports is not quite as intense."
The forecast could also be affected by current low US grain prices, which made it profitable for farmers to increase their production, the removal of European Union milk quotas in early 2015, New Zealand's weather and currency movement.
That fall was premised on a 25 per cent drop in international dairy prices, he said.
Milk prices had held up well over the past six months, based on the last GDT auction.
"The question is how long before you see some sort of response from global producers."
Steel said it could be another six months before there was any downward pressure on prices.
"Who knows, maybe the Chinese demand structural story continues to dominate and prices hold up a lot better."
If the world went into another economic downturn then New Zealand's floating currency meant any fall in international milk prices would see the dollar fall and would insulate any downside to payouts.
ANZ's February Agri Focus report had an opening forecast of around the low $7/ kg MS mark for the new season was "a real possibility".
"Combined with this year's record $8.40/kg MS, such a result would ensure strong farm-gate cash flow well into 2015.
It pointed to a downward price adjustment that was likely in the second quarter of this year when New Zealand dairy farmers look to extend lactation for as long as possible and Northern Hemisphere production peaked.
The report said that tight global stocks and good Chinese demand meant only a modest price adjustment was likely.