Dairy product prices fell 3.5% at the most recent Fonterra Global Dairy Trade auction and are now at their lowest level since 2009, according to Nathan Penny Rural Economist at New Zealand'd ASB Bank.
"Dairy prices are low and staying there a while longer," he said in his analysis of the latest Fonterra auction.
After a drought-driven false dawn in early 2015, prices have returned to their 2014 lows and, according to Penny, the Bank expects prices to remain low over the next two to three months, before finally beginning their lift.
He says the reasons for the prolonged dairy price slump are twofold:
- First up, New Zealand production has got a second wind, with the drought impact turning out modest and production forecast downgrades at the start of the year soon turning to forecast upgrades.
- Second, at the same time, milk demand is scarce. Importantly, the Chinese economy has struggled of late.
"We still expect production growth to slow to the point where demand can catch up, but this point will come later than previously expected," he said.
[no-app]Click to see Global Dairy Trade index over the last 10 years
According to Penny, a number of farmers are losing money at current farmgate prices, so dairy production is likely to slow as the new season begins.
Meanwhile, he says Chinese officials have swung into action to boost the Chinese economy.
The Chinese economy usually responds well to stimulus, but the current growth weakness may require additional stimulus moves and thus demand may take longer to gain traction than first thought.
Factoring in the prolonged dairy market weakness, ASB Bank has downgraded its milk price forecast for next season after flagging the risks were getting skewed to a weaker forecast.