Fonterra auction tactic succeeds - but long way still to go

Photo / Sarah Ivey

Fonterra's moves to reduce the amount of product on offer on the GlolbalDairyTrade platform appears to be having the desired effect, with prices rising by 10.9 per cent at this morning's auction, but the market has a long way to go yet before the co-op's milk price forecast can be realised, economists said.

Whole milk powder prices, which are key to determining Fonterra's farm gate milk price, rose by 12.1 per cent to an average US$2,078 a tonne. Most product groups posted gains at the auction, with butter milk powder rising by 30 per cent to US$1,829 a tonne and skim milk powder by 11.7 per cent to US$1,698 a tonne.

Fonterra last month cut its farm gate milk price to $3.85 per kg of milksolids, from a previous forecast of $5.25 -- well short of DairyNZ's breakeven estimate of $5.40 a kg.
Wholemilk prices need to reach US$3,000 a tonne by next year for Fonterra to deliver on its latest farm gate milk price forecast.

AgriHQ's theoretical farmgate milk price has increased to $4.19 per kg milksolids after the sale. Susan Kilsby, AgriHQ's dairy analyst, said the dairy derivatives market indicates whole milk powder prices will increase by a further 34 per cent by the end of the season.

The volume of whole milk powder offered by Fonterra this morning was 50 per cent lower than at the same auction held a year ago. "The lower volume of product on offer is lending support to the market in the short-term," Kilsby said.

But analysts said there needed to be a meaningful reduction in global milk production before a sustained recovery prices could occur. ASB Bank's Nathan Penny said dairy sentiment had turned but that the focus had now turned to production.

Farmers have culled aggressively so far this year, supplementary feed use is expected to fall, and there is a high risk that el Niño causes a drought this summer, he said.

There was talk leading up to the sale that China - the world's biggest dairy importer - had returned to the market after a long absence. Robbie Turner, head of European markets for Chicago-based Rice Dairy International, said the auction suggested the Chinese had in fact returned.

But despite this morning's encouraging lift, prices remain more than one third below levels at the start of March.

New Zealand and world overproduction has played a role in sharply weaker prices, but Fonterra has said it expects local milk production to fall by 2 per cent this season.
Economists also expect to see local production to decline this year, some by as much as 5 per cent.

However, a decline on local production has proved elusive.

Dairy Companies of NZ data showed that production remained strong over April, May and June was running well head of the same months last year, thanks to an unusually productive late autumn flush.