It was now more than 50c below the level Fonterra reconfirmed at its annual meeting.
“The fall in commodity prices in the November 7 GDT event means Fonterra’s $6.75 price is becoming more difficult to achieve,” AgriHQ dairy analyst Amy Castleton said.
There were some rotten apples in the basket of GDT products and contract times.
January shipment of whole milk powder lost 9.3% and the WMP index lost 5.5% to US$2852/tonne, below the $3000 level that underpinned a NZ$6/kg payout.
Butter was down 3.6% overall but the January shipment portion of the Fonterra offering was down 9.6%.
What was called the Contract 2 period (January shipment) tended to be where the larger GDT offerings sat and therefore they had the biggest influence on average prices, Castleton said.
Lack of WMP demand in Contract 2 might also have been linked to China’s very short tariff-free period early in the calendar year – January shipments did not arrive until February or March.
The NZX Dairy Derivatives market reacted to the GDT results and reflected an expectation WMP prices would stay between US$2800 and $2900 for the rest of the New Zealand dairy season.
Westpac economist Shyamal Maharaj said the 7% weakening in the NZ dollar value since the election was not enough to prevent lower dairy commodity prices taking 30c off the bank’s milk forecast, down from $6.50 to $6.20.
“We expect China’s growth to slow next year as the government focuses on economic rebalancing, which is likely to crimp demand for a range of commodities.
“Our forecast assumes dairy auction prices for WMP will fall by 12% between now and April 2018.”
But the first forecast for the 2018-19 season came out at $6.50, he said.
Rabobank dairy analyst Michael Harvey said the GDT was the third consecutive drop in the index and the largest drop since the start of the year.
“While the spring period in Oceania has had a mixed start in both NZ and Australia – the volume of product being made available on the auction is increasing as Fonterra adjusts its portfolio mix.
“Also, Asian buyers have had a busy few months purchasing so now have some short-term inventory cover and Chinese buyers have product ready for the FTA tariff window.”
Harvey said some commentators had already adjusted their farmgate forecasts and Rabobank would do so in its December quarterly publication.
ASB Bank senior economist Chris Tennant-Brown said the drop in GDT prices was at odds with the weaker spring milk production in NZ and now posed some downside risk to ASB’s milk price forecast of $6.75.
“The lower NZ$ is providing some offset to the current softening in prices but we need to see weak NZ production translate into higher prices over the season.
“We will be monitoring prices and production carefully over the month ahead.”
The records showed butter and anhydrous milk fat prices were still 30%-plus higher than this time last year but WMP and SMP prices were down by 13% and 21% respectively.
In total, the GDT index, at 1003, was steady on the level in November 2016, having spent a whole year in a band between 1000 and 1100.
Big, diversified processors like Fonterra could maximise returns from product options during the past year, responding to the record milk fat prices.
When taken together with forward sales and currency hedging, Fonterra might be able to maintain a $6.75 forecast when commentators with computerised market models were adjusting downwards.
