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Following a period of strong and stable New Zealand dairy prices, the ongoing impacts of Covid-19 will keep downward pressure on global dairy commodity prices through much of 2020. And as a result, New Zealand dairy farmers can expect a lower farmgate milk price for the 2020/21 season, according to a new report from agricultural banking specialist Rabobank.
In the report, New Zealand Dairy Seasonal Outlook: Battening down the Hatches, Rabobank says a number of factors linked to Covid-19 – including reduced Chinese imports, supply chain disruptions and consumption pull-back – combined with modestly rising dairy surpluses in export regions, will lead to an extended down cycle in global dairy markets.
Releasing the report, Rabobank NZ CEO Todd Charteris said while a more testing season awaits the country’s dairy farmers, the New Zealand dairy sector was well positioned to manage through the disruptions of Covid-19.
“Over the last three years, New Zealand dairy farmers have seen demand for their products grow strongly and they’ve enjoyed the strong dairy commodity pricing that has resulted. Many in the industry have taken advantage of this favourable pricing by reducing debt levels and this will help them address the challenges arising due to Covid-19,” he said.
“It’s also important to remember that New Zealand’s farmers are among the world’s most efficient producers of dairy products and this places them in a stronger position than most to deal with the impacts stemming from the virus.”
Rabobank milk price forecast
Based on the bank’s view of global supply and demand fundamentals, and aiming to factor in significant market uncertainty, report co-author senior dairy analyst Emma Higgins said Rabobank was forecasting a farmgate milk price of NZD $5.60/kgMS for the 2020/21 season.
“Given the rapidly-changing operating environment due to Covid-19, the forecast settings are incredibly complicated and there are a number of upside and downside risks that could impact the bank’s views on the global dairy markets over the course of our forecast timeframe,” she said.
“On the upside, these include stronger than anticipated Chinese demand, weakening of the NZ dollar further than our anticipated NZ 57 cents average over the forecast period, and stronger than anticipated economic growth.
“Downside risks include a lowering of the price floor for intervention buying by the European Commission, NZ dollar appreciation above 57 cents, Covid-19 re-infection in China, higher than anticipated global milk supply, and worse than anticipated global demand softness as a result of extended shutdowns, or large falls in discretionary spending.”
Due to the heightened uncertainty in the market, the report says Rabobank anticipates New Zealand dairy processors will announce conservative opening forecasts for the 2020/21 season.
Ms Higgins said this would flow through to any advance rate payments impacting budgets, and farmers should plan for this accordingly.
“The adaptability of farming budgets will be crucial over the season ahead, with the need for strong financial discipline required for New Zealand dairy farmers to be in a stable position coming out of this cycle,” she said.
“New Zealand dairy farmers have ridden through a similar position before, most recently with the ‘dairy downturn’ in 2015 and 2016. History suggests maximising pasture growth and focussing on home grown feed, minimising unnecessary cost creep and adopting a proactive approach to risk management (where possible) are key focusses in tough economic times.”
Global demand risks
The report says as Covid-19 spreads around the globe and containment efforts ramp up, economists are beginning to use stronger terminology to describe the market fall-out and, tellingly, the International Monetary Fund (IMF) is now anticipating the current market scenario to cause a recession as least as bad as during the global financial crisis.
“Dairy will not come out of this economic cycle unscathed and over the coming 12 month period dairy commodity prices are not expected to be pretty – particularly over the second and third quarter of 2020,” Ms Higgins said.
“Rabobank is forecasting for the ongoing fallout of coronavirus on global markets to result in a weak price cycle through 2020 – including the key selling season for New Zealand’s corresponding production season.”
Ms Higgins said one of the significant factors Rabobank is closely monitoring over the coming 12 month period is the level of Chinese import activity.
“With high Chinese milk production, accumulation of dairy inventory and rising unemployment figures, we remain extremely cautious as to China’s appetite for dairy imports across 2020,” she said.
“We have anticipated China’s import requirement of dairy powders falling by up to almost 40 per cent year-on-year by volume in 2020 in our milk price forecasts. Should this not be the case, our forecast would improve to more profitable territory.”
Despite the expected drop in global dairy demand, Ms Higgins said there are supportive factors specific to New Zealand dairy farmers which will help to support the farmgate milk price at levels higher than seen in the ‘dairy downturn’ or the GFC.
“Milk supply across the export engine has been quite modest – aided by an anticipated sharp drop-off in milk production in the North Island of New Zealand over the final months of the current production season,” she said.
“More specifically in favour of NZ dairy farmers, the value of the US dollar has lifted markedly against the NZ dollar. As Covid-19 became a global pandemic, the value of the NZ dollar has slid 10 per cent and this will be a welcome respite for New Zealand dairy farmers over the coming months as it helps to take out some of the bite of falling USD-denominated dairy commodity prices,”
Implications for farmers
In addition to strict budget management, Ms Higgins said the less favourable dairy commodity pricing outlook would also require farmers to look closely at their input costs and risk management strategies.
“Global input supply chains remain largely operational despite Covid-19 containment efforts. However, there is a high risk of greater interruption either to agrochemical production or logistics. Dairy farmers should be in regular communication with their suppliers regarding both availability and alternative plans should inputs not arrive on time. Local input prices for fertiliser have remained firm – but dairy farmers should be budgeting for a lift in prices due to the weaker NZ a dollar and the possibility of further production cuts,” she said.
“High commodity price volatility over the coming months is also inevitable. As we enter into this new market phase New Zealand dairy farmers fortunately have a few more risk mitigation offerings available to them than what was possible in the ‘dairy downturn’ or the previous GFC crisis. At least three products including Fonterra’s Guaranteed Milk Price and the NZX Milk Price Futures offering are available to most dairy farmers.”
Rabobank New Zealand is a part of the global Rabobank Group, the world’s leading specialist in food and agribusiness banking. Rabobank has nearly 120 years’ experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 40 countries, servicing the needs of about 8.6 million clients worldwide through a network of close to 1000 offices and branches. Rabobank New Zealand is one of the country's leading agricultural lenders and a significant provider of business and corporate banking and financial services to the New Zealand food and agribusiness sector. The bank has 32 branches throughout New Zealand.
Media contacts:
David Johnston
Marketing & Media Relations Manager
Rabobank New Zealand
Phone: 04 819 2711 or 027 477 8153
Email: david.johnston@rabobank.com
Denise Shaw
Head of Media Relations
Rabobank Australia & New Zealand
Phone: +612 8115 2744 or +61 2 439 603 525
Email: denise.shaw@rabobank.com
