“The story is actually bigger than New Zealand,“ Stu Davison, senior manager of global insights at Chicago-based HighGround Dairy, said.
“Globally, just about everywhere is growing milk production and so milk supply is now outstripping demand,” he said.
High prices usually result in increased production, which in turn puts downward pressure on prices.
“In other words, the market has reverted to type – it’s the same old commodity cycle,” Davison said.
“A view had formed that environmental regulation would keep a lid on farmers’ capacity to expand,” he said.
But Davison said improved technology in breeding and feeding had helped to deliver production gains in the US, Europe and New Zealand.
He said the market had started to see the risk of a milk glut.
“If farmers globally don’t get the signal to slow down, then we could get to a glut pretty quickly.”
NZX futures pricing is pointing to a $9.77/kgMS farmgate milk price for the current season, compared with Fonterra’s forecast range of $9 to $11 (with a $10.00 mid-point).
Global Dairy Trade (GDT) auction prices have been falling in recent months, which has driven futures market pricing lower.
At the last sale on November 5, the GDT price index dropped by 2.4%.
Whole milk powder prices, which have the greatest bearing on Fonterra’s milk price forecast, fell by 2.7% to US$3503 a tonne, making for a near 20% decline since early May.
If next week’s GDT auction is again weak then futures market pricing would quickly recede further, Davison said.
“There’s probably more downside to it than upside at the moment,” he said.
Agriculture lender RaboBank said “the global milk faucets are flowing”.
With global milk supply growth on the rise, the global dairy market looks set to face a period of increasing exportable surpluses which will “test the market balance” over the year ahead, the bank said.
In its third-quarter Global Dairy Quarterly Report, Rabobank said the velocity in milk supply growth across most of the key dairy export regions had shifted, outperforming previous expectations.
July milk production in the US was up by 3.4% year-on-year (YOY) – the highest growth rate since 2021 – RaboResearch senior analyst Emma Higgins said.
“We’ve also seen really strong New Zealand production following a record start to the new 2025/26 season.”
Higgins said improving farm margins, recovery from last year’s disease outbreaks, and the absence of disruptive weather were expected to drive milk supplies higher in the coming months.
“Across the big seven exporting regions – New Zealand, Australia, the EU, the US, Uruguay, Argentina and Brazil – we’re expecting milk supply growth of 2% YOY for the second half of 2025 before slowing to 0.44% YOY in 2026,” she said.
Most European and Oceania farmgate milk prices are near record highs, Higgins said.
“At the same time, purchased feed prices are expected to be favourable into 2026, as ample supplies keep prices in check,” she said.
RaboResearch senior analyst Emma Higgins.
October marks the seasonal peak for milk production in both New Zealand and Australia, but the two countries are experiencing contrasting trends.
Across the Tasman, production is set to fall again in the current season, as ongoing feed shortages and a smaller milking herd in drought-affected areas continue to have an impact.
Despite the changing supply and demand fundamentals, RaboResearch still says a New Zealand farmgate milk price of $10.00/kgMS is possible for the 2025/26 season.
“Although a gradual recovery in demand should help absorb the additional volume, near-term price softness is likely,” Higgins said.
One of the key risks to maintaining a $10.00/kgMS forecast is the potential for increased milk production out of New Zealand.
“With broadly favourable weather conditions, strong cashflows and the sun emerging, the 2025/26 season could see a robust spring flush, adding further supply-side pressure to global markets,” Higgins said.
“These dynamics suggest that while $10.00/kgMS is still possible, it will require a delicate balance between supply growth and demand recovery.”
NZ dollar weakness
While dairy prices are under pressure, farmers at least have a weak New Zealand dollar on their side, which helps make exports more profitable.
The currency last week hit a seven-month low of US56.46c, having traded through a US54.86c to US61.20c range over the course of this year.
“There was [a] huge amount of volatility being seen around the US April 2 Liberation Day announcements,” ANZ strategist David Croy said.
He said much of the currency’s weakness could be put down to falling domestic interest rates.
The Reserve Bank’s Official Cash Rate now sits at 2.5%, compared with the US Federal Reserve’s fed fund rate of 4% and the Reserve Bank of Australia’s official rate of 3.6%.
Where to from here?
“We’re sort of characterising the outlook as the darkest-before-the-dawn type of thematic,” Croy said.
“The Kiwi tends to do well over November and December and that’s a seasonality story.”
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
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