Following the upbeat GDT Price Index data from New Zealand, coupled with global clues, Westpac pushed up its prediction of the farmgate milk price forecast for the current season from $7.10/kg to $7.40/kg. This should help NZD/USD due to New Zealand’s reliance on dairy. Even so, the pair remains on the back foot while trading near 0.6585 by the press time of early Wednesday.

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Stronger than expected dairy prices so far this season have boosted the outlook for this year’s payout, and dry weather is creating a risk that prices could go even higher in the short term. However, our forecast still allows for some easing in world prices over this year as China’s economic growth slows and trade tensions remain high.

There’s a risk that world prices could be squeezed higher in the near term, as dry weather restricts the global milk supply. That’s especially the case for New Zealand.

DCANZ data shows that milk collections in November were up slightly on the previous year, and are up 0.5% for the season to date. But a lack of rain over the summer period has seen a rapid drying-out across many regions, which means that milk production could fall short over the tail end of the season.

It’s not clear to what extent the Australian bushfires will also impact the global milk supply. The Australian dairy industry has already been hit hard by drought in recent times – milk collections over 2019 were down 7% on the previous year.