The GDT index rose only 1.7% last week, well short of what the dairy derivatives market had signalled and commentators had expected.
The small increase raised fears the recent world dairy price surge had run out of momentum and the pattern would repeat the short-lived rally of spring 2015; fears that would have to be parked until the October GDT auctions.
A few hours later Fonterra made its second 50c/kg forecast increase in a month, partly on larger GDT rises totalling 30% over the previous two months.
The combined $1/kg lift in payout, when delivered over the next 12 months, would add $1.8 billion to the rural economy and $145,000 annual income to the average-sized dairy farm.
Since the previous milk price review in August global milk supply had continued to reduce and demand had remained stable, Fonterra chairman John Wilson said.
“Milk production in key dairying regions globally is reducing in response to low milk prices.
“There is still volatility in global dairy markets and we will continue to keep our forecast updated for our farmers.”
John Wilson
Fonterra
“Milk production in the European Union is beginning to flatten out and our milk collection is currently more than 3% lower than last season.
“While we have seen some improvement in GDT auction prices recently, the high New Zealand dollar versus United States dollars exchange rate is offsetting some of these gains.
“There is still volatility in global dairy markets and we will continue to keep our forecast updated for our farmers.”
Fonterra’s milk price announcement came a day before the release of its final 2015-16 annual results, when payout was confirmed at $4.30/kg MS ($3.90 from milk and 40c dividend), the worst for a decade.
The $5.25/kg forecast was now above the breakeven level for the average dairy farm, which was very welcome news after two years of losses, Federated Farmers dairy chairman Andrew Hoggard said.
The announcement was somewhat surprising and it was good for morale though the cashflow situation wouldn’t change much.
But Fonterra did increase the advance rate by 50c to $3.60/kg for the October payment and by 20c for the three months following, which meant about $25,000 more cash per farm compared with the previous advance rate schedule.
ANZ Bank said the cashflow for a fully shared farmer would be about $5/kg for the 2016-17 financial year, which would be breakeven.
Rural economist Con Williams said the 0.2% reduction in whole milk powder prices in the latest GDT showed Chinese buyers had bought what they wanted for January/February delivery, the preferential free-trade window.
Therefore, the next series of GDT auctions would determine the sustainability of the recent rally in prices.
“We expect the rally to have more durability than last year’s,” Williams said.
The US$3000/tonne mark for WMP would take some breaking but if prices remained in the $2800 to $3000 range that would produce further increases in the farmgate milk price.
ASB rural economist Nathan Penny said the lift in forecast was confirmation dairy markets had fundamentally shifted.
Farmers had changed behaviour in response to lower milk prices by reducing milk production and Penny believed there was further production weakness to come in 2016.
“We therefore expect prices to stabilise around current levels before lifting again later in the season.”
Westpac said it would stay at its $5/kg prediction and that assumed a partial retracing of the recent world price increases.
If that didn’t happen there was upside risk to the bank forecast, economist Anne Boniface said.
