Amy Castleton
Just as dairy commodity prices started to recover from their December falls, they took another hit as the market got the jitters over the potential impacts of Coronavirus. So far, the perception of a potential drop in demand for dairy and the sentiment surrounding this has had a greater impact on prices than any actual fall in demand from China.
Prices fell 4.7% at the February 4 Global Dairy Trade (GDT) event, and look set to fall further at the February 18 event. Participants and analysts have been nervous that China will stop buying due to demand for dairy falling as people cease dining out and there is increased difficulty getting product both to and into the country. So far, this has not proven to actually be the case. China was fully present at the February 4 GDT event, and bought a reasonable volume of product. Comments from NZ processors have largely focused on the fact that they are managing any issues that have arisen. Whilst the sudden negative sentiment has had quite an impact, this will hopefully only be short term.
On the other side of the coin, adverse conditions across NZ should be supportive to prices. Most of the country – all of the North Island and the north and east of the South Island – is very dry, with an adverse event declared for drought in Northland. And the West Coast and Otago/Southland are excessively wet for this time of year, with an adverse event declared in the far south due to flooding. Neither situation is ideal, and we expect this will be reflected in milk production figures from February onwards. As well as affecting pasture, the adverse conditions are also affecting the grain harvest at a critical time. Yields are likely to be down, and this will affect feed availability over autumn/winter.
The NZX forecast for the full 2019-20 season has dipped to 0% – that is, no growth this season against last season. There is further downside potential for this forecast depending on what happens with conditions.
Assuming the impact of Coronavirus is short-lived, the state of NZ milk production should prove supportive to dairy commodity prices, and thus milk price forecasts. At this stage, we are still forecasting a milk price over $7/kg MS. At the time of writing, the NZX forecast is $7.18/kg MS, which does account for some further downside in dairy commodity prices. As the majority of this season’s product will have now been sold, commodity prices would need to come down quite a bit further for milk prices to fall too much. A $6-$7 milk price for the 2019-20 season is still very likely.
Milk production elsewhere in the world should prove similarly supportive to commodity prices, at least for now. Australian production is still falling and European production has been slower than expected. US milk supplies are now starting to pick up after slow growth at the end of 2019; however this is not having much effect outside the US just yet.
