New Zealand dairy giant Fonterra has warned its suppliers to expect a lower milk price next season. In a letter to shareholders this week, Fonterra chair John Monaghan told farmers to be ‘cautious’ when it comes to on-farm spending and investment decisions over the coming months as milk prices for the 2020/21 milking season are likely to fall.

Monaghan said that the supply-demand balance in global dairy markets is headed in the wrong direction with milk supply in Europe and the US rising just as dairy market demand has plunged due to COVID-19.

Global production

“Milk supply in Latin America, the UK and EU is also expected to be up on last year, with good growing conditions for UK and EU farmers as they went into their spring peak. This is likely to disrupt the global supply-demand balance that has supported solid milk prices in the 2019/20 season,” said Monaghan.

Milking season

In New Zealand, the milking season runs from July to June as the seasons are reversed in the southern hemisphere. The 2019/20 milking season in New Zealand, which runs from July 2019 to June 2020, is now entering its final months and cows will be dried off in another month.

Fonterra has confirmed that dairy farmers will be paid a final milk price for this season that’s somewhere in the range of NZ$7/kg and NZ$7.60/kg of milk solids (MS), which equates to a range of between 28c/l and 30c/l.

However, the global economy has been severely disrupted by the COVID-19 pandemic, meaning dairy demand is likely to be subdued for 2020 and possibly into next year.

“The global recession will impact people's purchasing power and that will be reflected in prices for all products and services. The scale of the impact is impossible for economists to predict right now,” said Monaghan.

“Key amongst those markets is China. That economy is slowly returning to a new normal. We are starting to see key foodservice outlets such as Starbucks and McDonald's re-open their doors in China. While that's good news, there's a lot of recovery still needed in that market,” he added.