The world’s biggest dairy exporter has forecast that milk prices could hit a record over the next year due to surging demand from China, in a sign of how a boom in commodities is spreading through agricultural markets.
New Zealand’s Fonterra on Wednesday released its highest-ever opening forecast for farm gate milk prices of between NZ$7.25 and NZ$8.75 (US$5.29 and US$6.39) per kilogramme of milk solid for the 12 months beginning June 1.
The range indicates the price Fonterra expects to pay farmers for the coming season. At a midpoint price of NZ$8, Fonterra’s 10,000 farmer suppliers would receive NZ$12bn.
It is the latest indication of how global commodity markets have gone into overdrive in recent weeks as the world’s largest economies recover from the coronavirus pandemic. The prices of iron ore, copper and timber have all hit record levels over the past month prompting some analysts to predict a supercycle, a prolonged period where prices remain significantly above their long-term trend.
“Global demand for dairy, especially New Zealand dairy, is continuing to grow. China is leading the charge as its economy continues to recover strongly,” said Miles Hurrell, Fonterra’s chief executive. “Growth in global milk supply seems muted and the global supply of whole milk powder is looking constrained.”
Surging demand is set to benefit the economy of New Zealand, which some analysts have nicknamed the “Saudi Arabia of milk”, with dairy making up a third of the country’s goods exports.
Michael Harvey, an analyst at Rabobank, said strong milk prices were part of a trend of China buying up large amounts of agricultural commodities, as well as constraints on supply due to bad weather and rising feed costs.
“The Kiwis benefit the most when commodity markets are really strong, which they are currently. But they feel the pain faster when the commodity market turns,” said Harvey.
New Zealand’s central bank said on Wednesday that the country’s economy had been boosted by strengthening commodity export prices. The upbeat comments caused some economists to predict New Zealand would be among the first developed economies to raise interest rates following the pandemic.
ANZ Bank said it expected the Reserve Bank of New Zealand to begin raising rates in August 2022 but “the risks are now skewed towards earlier”.
Under Fonterra’s co-operative structure, high farmgate milk prices put pressure on the group’s earnings because it is unable to immediately pass on the increases to customers that have contracts for its infant formula, butter and cheese products.
“The fourth quarter will be challenging from an earnings perspective and we expect the margin pressure to continue into the first quarter of the 2022 financial year,” said Hurrell.
Cost-cutting over the past two years following a management and board clearout has boosted performance at the co-operative. Fonterra said net profit after tax in the nine months to April rose 61 per cent year on year to NZ$587m.
Kelly Amato, an analyst at Fitch Ratings, said Fonterra could ride out higher milk prices. “Fonterra has made good progress in reducing debt and so even with higher milk prices putting pressure on margins, we still expect the group balance sheet to remain strong,” she said.