Dairy price too low for Fonterra forecast

Fonterra last week said the payout available to farmers in the 2015/16 season was forecast at $4.25-$4.35 a kg. Photo / File

Milk powder prices will need to improve substantially before Fonterra's revised farmgate milk price of $3.85 per kg of milk solids can become a reality, say analysts.

Fonterra last week said the payout available to farmers in the 2015/16 season was forecast at $4.25-$4.35 a kg, comprising the farmgate milk price of $3.85 per kg of milk solids and a forecast earnings per share range of 40c to 50c a kg.

"Based on the current inputs that make up the payout, the market would need to see a 15 per cent increase from current prices for $3.85 per kg of milk solids to be achieved," said OM Financial's director financial markets, Nigel Brunel.

ANZ rural economist Con Williams said there was "downside risk" in the latest milk price forecast and that a substantial improvement would be required before $3.85 became a reality.

At last week's auction prices for the two key products - whole milk powder and skim milk powder - fell sharply to US$1590 a tonne and US$1419 a tonne respectively.

Analysts expect production in New Zealand and around the world to fall in line with low prices, thereby creating a more price-friendly supply/demand balance.

"There has to be a supply response at some point, not just here, but globally because everyone is making too much milk and there isn't sufficient demand in the system to meet that supply," Brunel said. "Milk production is often deemed inelastic but at some point farmers will stop producing milk if losses continue."

Trading activity in NZX futures yesterday suggested prices would be flat over the next few months, but with a pronounced pick-up later this year and early next year.

For the November to May 2016 contract periods, there were gains of US$100 to $150 a tonne, with the May 2016 contract for whole milk powder settling at US$2300 a tonne.

Last week's poor GlobalDairyTrade auction set off a series of comments on Twitter that trade on GDT should be suspended.

GlobalDairyTrade director Eric Hansen said GDT was working as it should and continued to provide globally recognised market-based benchmark prices.

"Last week's auction saw an increase in the number of bidders and an increase in total demand across all products sold on the platform," he said. "First round bidding demand increased nearly 60 per cent, exceeding the normal seasonal increase in supply offered at the auction," he said. "Demand is responding to current price levels as we would expect."

Last week's auction saw the number of active bidders increase by 13 per cent. "However, there remains a supply and demand imbalance in the world market and this was reflected in the prices," Hansen said.

Fonterra's managing director global ingredients, Kelvin Wickham, said GDT prices were "a reflection of the market".

"And to those calling for GDT to be suspended, that's not going to solve the supply/demand imbalance," Wickham said.

On Friday, Land O'Lakes formally withdrew from GDT, with the American co-operative saying it had decided to focus resources on other sales channels.

In April, one of Europe's biggest co-operatives, Molkerei Ammerland, said it had withdrawn from selling products on the auction platform.