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Dairy prices will probably decline over the last few months of the New Zealand season as farmers ramp up milk production to benefit from record payouts.
Prices generally hold up on lower volumes heading into the end of the season in May, however volumes will be higher than normal this year as farmers had favourable growing conditions in the lead-up to the main producing season and bought extra feed to increase milk production in anticipation of higher prices, said ASB Bank rural economist Nathan Penny.
Auckland-based Fonterra Cooperative Group, the world's biggest dairy exporter, last month raised its payout to farmer suppliers to a record level on the back of strong global demand. New Zealand dairy farmers will probably produce 11 percent more milk this season than last season, which will equate to around a 9 to 10 percent increase in volume for Fonterra, ahead of the dairy group's forecast for a 7.5 percent increase in volume, ASB says.
"Farmers are pretty motivated to get more milk out of their cows given what Fonterra is paying them," Penny said. "If our production forecast is right, once this milk hits markets, dairy prices will come under further pressure in the tail end of the New Zealand season."
Whole milk powder fell to US$4,439 a tonne in Fonterra's most recent fortnightly GlobalDairyTrade auction this month from about $5,000 in February and will probably head down towards $4,000 a tonne over the next few months as the extra volumes hit the market, Penny said. Prices will likely recover again after the end of the season as milk supply peters out, he said.
"Markets plan ahead, they know that New Zealand volumes will decrease at this time of year so they buy in advance of that - now there is going to be more than they anticipated in the market at this time of year, so that will put downward pressure on prices," Penny said.
Fonterra has the ability to stockpile milk powder for a few months, giving it some flexibility over when it releases the extra volumes, Penny said.
"There's more production coming Fonterra's way - it's just a question of when Fonterra decides to put that milk into the market," he said. "Eventually they have to get it out the door which means there will be that pressure on prices."
Dairying makes up almost a third of New Zealand's export earnings.