Saturday, March 30, 2024

Markets don’t back Fonterra price

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Fonterra’s 15c/kg milksolids increase in the milk price forecast at the same time the Global Dairy Trade auction price index recorded a third consecutive small loss resulted in differing views from market analysts.
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AgriHQ dairy analyst Amy Castleton said the latest, higher forecast by Fonterra is not backed by the GDT results and the subsequent futures market movements.

Her own milk price model, run a day after the GDT auction and the release of Fonterra’s interim results, generated a 1c rise to $6.27/kg MS, 28c behind Fonterra.

“Dairy commodity prices really need to lift for Fonterra to be able to achieve its ambitious $6.55 forecast and this is looking fairly unlikely,” she said.

“Continuing growth in global milk supply puts downside pressure on commodity prices.”

Prices for dairy commodity futures trading on the NZX Dairy Derivatives market are marginally stronger than they were after the previous GDT event but prices are still expected to fall through the rest of the season and Fonterra’s financial year.

Castleton said part of the explanation for the 28c disparity could be the non-GDT sales made at higher prices by Fonterra, which is now close to having sold all this season’s production.

Fonterra chief executive Theo Spierings said the volumes being sold through GDT are much smaller now, perhaps only a third of what they were five years ago.

Off-GDT sales are consequently a bigger influence on Fonterra’s milk price model, having added about 6c/kg in the first half.

Fonterra’s reduced milk volume in the first half (down 11% compared with 1H 2017) was made into categories of products as follows: base ingredients 33%, GDT commodities 22%, non-GDT advanced ingredients 19%, consumer products 13%, food service 11% and DIRA sales 2%.

The global dairy market remains weighted towards demand over supply, Spierings said.

Recent highlights included a 13% increase in China’s imports, a 4% increase in Asian countries excluding China and a 5% increase in Latin American imports, whereas the region had been expected to be a net exporter.

On the supply side milk production growth is modest, including 1% increases over the past 12 months in the United States and NZ and 2% in the fourth quarter of 2017 in the European Union.

EU companies are paying their farmers well in excess of the spot market price for milk so that is not sustainable, Spierings said.

But Fonterra’s milk collection this season is forecast to be down 3% to 1480 million kilos MS, the third consecutive similarly sized annual reduction in milk supply.

Fonterra chairman John Wilson said the global supply and demand picture remains positive.

“We expect prices to stay around current levels but we will be watching for any impact in market sentiment as spring production levels build in Europe.”

Other dairy market commentators chose to realign their predictions with Fonterra’s higher revised forecast.

Westpac moved its prediction up 5c to $6.55, observing that the bulk of dairy products have been sold for this season.

“Looking ahead, we expect dairy prices to continue to ease gradually in the coming months as global supply continues to expand at a relatively steady pace and demand is expected to remain relatively robust. 

“A weaker NZ dollar should also boost local prices and, while it is early days yet, we’re forecasting a $6.50 milk price for the 2018-19 season,” Westpac said.

ANZ rural economist Con Williams said Fonterra’s lift in milk price forecast indicated stronger margins for products sold outside the GDT platform.

“We maintain our 2018-19 opening milk price forecast of $6 to $6.25/kg MS.

“The recent downward pressure on NZD and milk powder prices holding at the top of recent ranges creates some upside risk but we suspect international prices could be under a little bit of pressure into May on improved milk flow. 

“The demand side of most dairy markets looks strong, meaning any downside should be fairly limited.”

ASB rural economist Nathan Penny moved his forecast higher by 5c, to align with Fonterra, and said that should dairy auction prices hold near current levels, the milk price could edge higher to $6.60.

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