After 10 consecutive price decreases over five months of GDT auctions the average price rose $159 to US$1974/tonne on August 19.
Whole milk powder (WMP) prices rose 19.1% to average $1856.
But that remains a long way below the $2500 recovery level at which milk price forecasts between $3.50 and $4/kg milksolids (MS) were predicated.
It is still further to the mid-$3000 level where farmgate returns would overtake farm working expenses.
Northland dairy farmer Peter Skelton, at Waiotira, said he wasn’t getting too excited about the big spike in GDT.
“I had a grim smile that day.
“That’s because I knew how much more was needed to maintain the forecast of $3.85.
“Probably three or four such increases are needed before we could call an improving trend.
“It is a long road to recovery after two years of falling prices and we saw a short-lived rally in February and March when Fonterra predicted a drought.”
That was when Skelton contracted palm kernel deliveries for this season, marginally sustainable when the milk price forecast was $5.25 but a loss maker at $3.85.
However, the contracted kernel keeps coming and has to be paid for.
AgriHQ dairy analyst Susan Kilsby said Fonterra’s milk price forecast was now looking achievable.
“Dairy commodity prices need to continue to track upwards in line with NZX Dairy Derivatives market projections to reach the current forecast price.”
The NZX Dairy Derivatives market indicates whole milk powder prices increasing by a further 45% by the end of the season.
“Fonterra still has a lot of product to move but it will be easier to sell that product now that prices have started tracking upward.”
Susan Kilsby
AgriHQ
Kilsby warned it would not be plain sailing ahead.
“Global dairy markets remain oversupplied. Until global milk supply slows, the market will remain very volatile.
“Fonterra still has a lot of product to move but it will be easier to sell that product now that prices have started tracking upward.”
After the GDT auction results Kilsby said farmers called her wondering if international prices had now reached the $3.85/kg MS forecast, to which she replied with the AgriHQ snapshot price of $3.39, up 90c from the previous GDT auction.
That calculation was a measure of the season’s milk price if all NZ production was sold at the August 19 GDT prices.
Like Fonterra, AgriHQ had to make assumptions about price levels for the rest of this season, with nine months left to run.
It used the NZX Dairy Derivatives market because it contained the price predictions of a wide range of dairy processors, traders and customers.
For example, the May 2016 WMP futures contract had risen to US$2700/tonne, effectively predicting the 45% increase to come.
Federated Farmers dairy section chairman Andrew Hoggard said farmers needed to remain vigilant, especially over farm costs, while waiting to see if the upturn persisted.
Westpac market strategist Imre Speizer said he was loathe to get too carried away with one observation against a trend line that was two years old.
“The bounces (in each product sold) were large but have merely returned prices to the levels of early August and they are still 39% below last March.”
Speizer also pointed out bidding participation in the August 19 auction was up and that only 77% were successful bidders for product, suggesting unfulfilled demand.
ASB rural economist Nathan Penny said the market might recover ground lost in the previous three losing auctions but thereafter increases would be more difficult.
The GDT market was anticipating the 2-3% forecast reduction in NZ milk output but it would need evidence of that slowdown during spring.
Material reductions in European and Chinese milk production were also needed to sustain the lift in world prices, Penny said.
MORE: Try the AgriHQ Farmgate Milk Price Calculator at agriHQ.co.nz/toolbox
