Milk prices on the up – supply and demand

Demand – this has been healthy especially from China as higher domestic milk prices there has likely led to greater milk imports from New Zealand. The number of unsatisfied buyers at recent auctions has been elevated and forward price curves for major products are relatively flat suggesting fundamental strength rather than a near term short squeeze.

Supply – NZ supply as milk production dipped below usual levels in November and with drier weather in North Island extra supply for this time of year will be unlikely.

Fonterra lifted its 2020/21 milk price forecast to a range of $6.90 to $7.50 (up from $6.70 to $7.30 previously) – see graph below.

BNZ Bank – Economy Watch

This being said Fonterra has to be cautious with:

  • NZ weather conditions – drought can increase the price of feed and deplete water stores for cows and can reduce the ability of dairy farmers to grow feed and ultimately reduce their herd.
  • challenges from further escalation of COVID – global demand could soften as a result of extended shutdowns, or large falls in discretionary spending.
  • increasing milk production in the Northern Hemisphere – In Europe and the US, previous dairy stockpiles are now reaching commercial markets which will depress prices.
  • Strong NZ$ – milk is sold on the GlobalDairyTrade (see below) in US$. If the NZ$ gets stronger it will take more US$ to convert into NZ$ so higher domestic milk prices.

How does the GDT work?

GlobalDairyTrade trading events are conducted as ascending-price clock auctions run over several bidding rounds.  In each auction a specified maximum quantity of each product is offered for sale at a pre-announced starting price. Bidders bid the quantity of each product that they wish to purchase at the announced price. If the price of a product increases between rounds, to ensure their desired quantity a bidder must bid their desired quantity at the new, higher price. Generally, as the price of a product increases, the quantity of bids received for that product decreases. The trading event runs over several rounds with the prices increasing round to round until the quantity of bids received for each product on offer matches the quantity on offer for the product (as shown in the diagram below). Each trading event typically lasts approximately 2 hours.

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