Analysts say the market reacted to news of New Zealand’s strong end to the milk production season and hesitancy from buyers to pay the recent premium commodity prices.
The GDT index fell 3.6% to US$3924/tonne average across eight products and six contract periods.
The index is now 10% below its recent high in early March, but still 22% higher than this time last year.
Prices have fallen in each of the past six twice-monthly auctions, during the three months of New Zealand low season for milk production.
Whole milk powder prices (WMP) dropped 3% in the latest auction, skim milk powder (SMP) minus 7% and cheddar minus 9%.
Butter and anhydrous milk fat (AMF) prices dropped 3.2% and 0.9% respectively, as milkfat products fared better than protein products.
Westpac economist Paul Clark says despite WMP prices falling below US$3900/t, it’s are still 20% higher than last July.
He says the current bank forecast of $8/kg milksolids for the new season did incorporate some easing back of WMP prices.
However, ASB economist Nat Keall says his prediction of $8.20 in the farm gate milk prices was now threatened on the downside by the fall in global dairy prices.
“Prices are moving lower a shade faster than we had previously anticipated and the fact the fall comes despite the fall in Fonterra’s volumes on offer is a bearish sign,” Keall said.
“The contract curve also now has a sizable downward slope, showing prices falling substantially for later dated contracts.
“This suggests prices have lost a bit of momentum as we head deeper into the new season.”
NZX dairy analyst Amy Castleton says her milk price forecast had dropped 15c to $7.81/kg following the GDT result and trading on the futures market over the past two weeks.
The reworked forecast was down 22c from the one NZX sent out in mid-June.
The GDT price movements were partly in reaction to Fonterra’s news of a 1.5% milk collection increase in the dairy season ended May 31.
It is only the second small seasonal increase in milk production in the past seven seasons, since peak milk for Fonterra back in 2014-15.
That peak was 1614 million kg milksolids, while last season the tally was 1539.
The 80m kg gap is equivalent to one billion litres and about a 5% reduction over the past seven years.
Fonterra says in its capital restructuring discussion document that further reductions could result in 100m to 250m kgs (6 to 16%) less milk by 2030.
Against this backdrop, which has serious implications for processing capacity and profitability, the market latched on to the recent strong autumn production.
Fonterra’s May intake was 7.7% ahead of May 2020 and April was 11% higher.
The Dairy Companies Association of New Zealand reported that seasonal production in 2020-21 was 1947m kg, which therefore disclosed that Fonterra collected 79% of the total.
The national tally the previous season was 1896m kg, so NZ milk production in total rose by 2.6% in the 2021 season.
