Markets

Speculation mounts on farmgate milk prices

By John Droppert

As farmers nervously await a definitive autumn break, speculation is concurrently intensifying around 2018–19 farmgate milk prices.

Some processors have made early announcements, and more are likely to follow suit, as the battle to secure milk from out-of-contract farmers (and those prepared to repay upfront incentives) heats up.

Others may hold their cards closer, in the hope of firming up sales contracts, securing extra information to build the business case.

On the information front, the global dairy market is keeping everyone guessing. To be clear, commodity prices in general are at similar or better levels to last year, and a 5 cent lower AUD/USD exchange rate adds helpfully to Australian dollar returns.

The shorter-term movements are the uncertain part.

As the Southern Hemisphere winds down, further tightening in Oceania supply combined with uncertainty around northern hemisphere milk production has kept dairy commodity prices firm.

European milk production trends are highly varied by country (the United Kingdom and Ireland being up, France and Germany down, for example), while the United States posted a (very slight) decrease in milk production for March.

Drier conditions in New Zealand manifest as a February slowdown in milk production, after strong gains for the season to date. This in turn helped further, consecutive, gains in GlobalDairyTrade (GDT) pricing that have underscored continued market support.

At the same time, Australia’s milk production continues to trail 2017–18, and the outlook for 2019–20 is heavily rain-dependent, but with the strong likelihood of an additional volume decrease.

At a commodity level, butter prices have continued to increase locally, driven by extremely tight supplies in Australia and increasingly limited spot availability in New Zealand. This has posed an interesting contrast to European prices, which continue to weaken in the lead-up to the Northern Hemisphere season peak.

Imports of butter into Australia are likely to grow further, with reports of additional shipments on the water and more food manufacturers carrying out trials of European-sourced product.

Having had an impressive run in the immediate post-intervention period, skim milk powder (SMP) prices appear to have approached a ceiling. Buyers who extended their forward coverage have slowed their activity, while sluggish northern hemisphere markets had stretched the ‘Oceania premium’ as local pricing increased.

The modest retreat at GDT event 232 (March 19) did flag some closing of that gap, but with seasonal easing likely in Europe and the US, a premium is likely to persist. Overall, the market for SMP is in a far better place than any time in the past four years.

With whole milk powder (WMP) remaining a low priority for many Australian manufacturers and New Zealand’s February milk production closing on prior year levels, pricing firmed this month. Expectations seem to favour prices remaining supported in the months ahead, although some additional volumes are likely to emerge from those European countries under pressure to get peak milk through plants.

Cheddar pricing has edged higher, although activity seems limited and the upward pressure is primarily linked to strong numbers for other product streams. Stronger northern hemisphere pricing (in particular a recovery in US indicators) is also contributing as the market searches for direction in the lead-up to the next round of Japan negotiations. The direction that cheese prices take both before and at these negotiations will be a major information point for those building a budget to purchase milk in 2019–20.

This market unknown will potentially be dwarfed by competitive factors however, as shortages push the cost of milk beyond its immediate input value.

For farmers, this will mean more announcements, and provide something other than the weather app to keep an eye on.