Whole milk powder (WMP) prices fell 7.1% to an average of US$2229/tonne, well below the $3500 recovery Fonterra said in late September would be necessary towards the end of this season to deliver its current $5.30/kg forecast.
At the time such a prediction was unusual and, it has proven, unwise.
Rather than rising to bolster that farmgate milk price, WMP prices had fallen a further 17%.
After the most recent GDT event, which produced an interestingly mixed outcome, economists and commentators reached for the red pencil.
New estimates of milk price ranged from $4.25 (AgriHQ) to $4.80 (Westpac).
“A Fonterra milk price forecast downgrade is a virtual shoo-in and we expect $4.70,” ASB Bank economist Nathan Penny said.
"The risks are that Fonterra's forecast goes below ours, although any lift in the dividend forecast would go some way to easing the pain.
“But the greater risk is that the gloomy outlook spreads to next season.”
Westpac senior economist Michael Gordon said although WMP prices were down 7% there were sharp increases for every other product on offer.
“That mix is more consistent with the Chinese overstocking story rather than a weak demand per se, which supports our view that the current price weakness will prove to be temporary.
“Nevertheless it doesn’t bode well for returns this season.”
ANZ Bank rural economist Con Williams said he refrained from trimming his current $4.75-$5 forecast because Fonterra seemed determinedly optimistic and dairy commodity prices other than WMP appeared to be rising.
Prices for anhydrous milk fat rose 9%, for butter 7.3%, for casein 9.3%, skim milk powder 5.7% and cheddar 5.2%.
Perhaps Fonterra had sold well outside of the GDT and had managed to make the most of its non-milk powder capacity, he said.
After trimming her forecast by 30c AgriHQ dairy analyst Susan Kilsby said the WMP price fall outweighed all of the rises, especially for Fonterra, which turned about 70% of its milk into WMP.
Whereas in 2013 Fonterra was held back by not having more WMP capacity, this year WMP returns had been a real drag on the milk price.
In October the volume of WMP shipped from all companies was down 17% compared with October 2013. China’s volume of NZ WMP was down 71%, 25,000 tonnes versus 87,000, she said.
Fonterra had been successful in putting that additional WMP tonnage into other markets like Vietnam, the United Arab Emirates and Algeria but now it had larger volumes there wasn’t much urgency to buy more.
Kilsby said the higher-than-normal buying of cheap WMP would further delay the market recovery.
The NZX dairy futures market contracts for March onwards were down to about US$2250, which showed the market thought the recovery expectation had been well-postponed.
Contract prices had fallen about 20% in the past fortnight.
“On the other hand, world WMP prices are now so low that we are more likely to see sharp rises when they do happen.”
She said the continued favourable feed-to-milk price ratio in the United States and some milk production increases for spring in Europe, when milk quotas would be abolished, suggested higher dairy product supply in the short term.
In October, our peak month, New Zealand’s production was up 5.4% milksolids compared with the same month last year.
“That is an extra 143,000 tonnes which is a lot of extra milk to sell, particularly when the markets are as weak as they are at present,” Kilsby said.
Williams said individual farmers wanted to maximise their milk production to compensate for the low returns, although that might not be in the national interest.
The chase after production resulted from capital reinvestment by farmers over the past five years averaging $850,000 a farm, a substantial boost in capability, he said.
On December 3 the GDT price index fell 1.1% and now 739 was the lowest mark since the first half of 2009 when the Global Financial Crisis hammered commodity prices.
The index mark was also half of its level in February this year, which meant dairy commodities sold on GDT on a weighted average had lost half of their value in 10 months.
Farmers now wait to see if their farmgate milk price will fully reflect that decline.
