What the rise in milk prices means for farmers

It's too early to say if this morning's auction signals a reversal of the downward trend that has plagued the market so far this year and for much of last year. Photo / NZME

World dairy prices firmed at the latest GlobalDairyTrade auction, the GDT price index gaining 1.4 per cent and ending a four-sale losing streak.

Wholemilk powder prices, which are a key component of Fonterra's farmgate milk price, rose by 5.5 per cent to US$1974 a tonne. Another important product, skim milk powder, gained by 1.3 per cent to US$1802 a tonne. Firm whole milk and skim milk powder prices will be supportive for Fonterra 's farmgate milk price forecast for this season of $4.15 a kg of milksolids - which is still short of an estimated break-even point of $5.25 a kg.

The start of a trend?

It's too early to say if this morning's auction signals a reversal of the downward trend that has plagued the market so far this year and for much of last year. A sustained price recovery looks to be some way off.

Overproduction still evident

Overproduction in the EU, due in part to subsidised milk price intervention, continues to depress a market that is struggling to cope with a supply/demand imbalance. Very low grain prices - which are linked to the price of oil - are encouraging farmers offshore to produce more because of the low cost of input costs.

China the bright spot

On the demand side, much depends on China - New Zealand's biggest customer for dairy. Latest import data shows that demand in China is picking up, which is expected to be supportive for prices.

Farmgate milk price still low

The run of weak sales so far this year has cast doubt around Fonterra's current milk price forecast of $4.15 per kg farmgate milk price. The co-operative is expected to review its forecast at this month's first half result on March 23.

Prospects for returns

Farmers face the prospect of two, or possibly three, years in a row of negative returns, with farmgate milk prices now well below DairyNZ's estimated breakeven point of $5.25 a kg of milk solids.

Farmers still under pressure

Federated Farmers has said lower dairy prices would put added to pressure on dairy farmers. A member poll last month showed more than one in 10 were under pressure from banks over their mortgage, up from 6.6 per cent in August and 7.6 per cent in November. The Reserve Bank estimates the level of debt in the dairy sector at $37.9 billion.