Fonterra set to lift farmgate milk price forecast despite fall in latest auction

Expectations of a slight improvement in Fonterra's farmgate milk price forecast remain intact, despite a decline in GlobalDairyTrade prices.

A modest lift in Fonterra's farmgate milk price forecast for 2016/17 is likely tomorrow, the Herald understands, despite a 3.2 per cent fall in prices at the latest GlobalDairyTrade auction.

The auction decline, which included a 3.7 per cent drop in key whole milk powder prices to US$3189 a tonne, was broadly in line with futures market pricing, and followed two straight auction gains. The GDT price index dropped 3.2 per cent.

A wholemilk power price of more than US$3000 a tonne is seen as a positive for farm profits and latest price represented a US$1000/tonne improvement on where the benchmark product was trading this time last year.

The auction follows Fonterra's announcement last week that it would put more product up for sale on the GDT platform after revising its milk production forecasts for the current season to a 5 per cent decline from a previous forecast of a 7 per cent drop, thanks to improved weather.

As the season nears its end, there was little in the auction to change the view that Fonterra was likely lift its farmgate milk price to about $6.25, from the current forecast of $6 a kg, economists said.

Fonterra's South Island competitor, Synlait Milk, has raised already raised its milk price to $6.25/kg.

"Current market developments and seasonal factors suggest there could be some more downside yet, but we struggle to see whole milk powder moving back below US$3000 [per tonne]," said ANZ rural economist Con Williams.

ANZ expects Fonterra's milk price to improve to $6.25/kg, as do many other banks.

AgriHQ dairy analyst Susan Kilsby said the markets were finely balanced.

"Many buyers will be aware that milk intakes in New Zealand are starting to improve following very poor production during the spring," Kilsby said.

"The dairy markets however are very closely balanced so it does not take much to tip the balance one way or the other with small changes in supply volumes."

The other key product for New Zealand producers - skim milk powder - fell in price by 3.8 per cent to US$2,574 a tonne.

Eric Meyer, president of Chicago-based risk management, advisory and brokerage firm HighGroundDairy, said there was a "disconnect" between Fonterra's pricing on GDT and what was happening in EU and US, where prices for whole milk and skim milk powder were far weaker.

"We continue to see EU and US skim milk prices plummet while Fonterra's price (on GDT) has held firm," Meyer said.

"I think there is potential for a large discount between northern hemisphere and pricing and what has been sold through GDT," he said.

"It seems that Asian demand has been good enough that they are willing to pay that premium for quality."

AgriHQ's Kilsby agreed.

"Despite the weak result overnight, the underlying market fundamentals are generally supportive for Oceania-sourced product," Kilsby said.

"We see this [fall] as more of a short-term market reaction to the change in Fonterra's milk forecast than the start of anything more serious."