Dairy farmers could be in for a higher milk price this season after a spike in Global Dairy Trade auction prices. Photo / Supplied
Dairy farmers could be in for a higher milk price this season after a spike in Global Dairy Trade auction prices. Photo / Supplied
Fonterra chief executive Miles Hurrell said the co-op was "running the numbers" to see what this morning's leap in dairy prices could mean for farmgate milk prices.
Hurrell, in an email to farmers, said the co-op had expected wholemilk powder prices to lift at the latest Global Dairy Trade auction.
"However a lift of 21 per cent was not anticipated," he said.
"We are now assessing the situation, running the numbers on our forecast farmgate milk price and talking to our sales teams on the ground in our markets to understand further what they are seeing, regarding future demand," Hurrell said.
Meanwhile banks have revised up their farmgate milk price forecasts after the spike in auction prices.
ANZ - New Zealand's biggest rural lender - revised up its farmgate milk price forecast for the 2020-21 season by 50c to $7.70/kg.
The bank's agriculture economist Susan Kilsby pitched her forecast for 2021-22 at $7.30/kg.
"Dairy commodity prices have traded in 2021 at a significantly higher level than expected, which has more than offset the stronger NZ dollar," Kilsby said in a commentary.
"Recent NZ dollar strength impacts the 2021-22 season's milk price more than the current season. There is also a much higher degree of uncertainty in the longer-term forecasts; hence a more cautious approach should be taken regarding next season's milk price."
Westpac agri economist Nathan Penny said wholemilk prices were "on a tear".
"Prices are up by nearly a half since November. When taken with the similarly large increases in milk fat prices - butter and anhydrous milk fat - we can assert that this lift has a New Zealand angle to it."
Penny said futures prices had suggested stronger prices but said the auction result was "right out of left field" adding it showed the strength of underlying demand out of China and the rest of Asia.
At this morning's auction, the GDT Index, which measures prices across the board, bumped up 15 per cent to 1346 - its highest point since March 2014.
The average US dollar price came to US$4231 a tonne.
The price of whole milk powder - which has the greatest bearing on Fonterra's farmgate milk price - spiked up by 21 per cent to US$4364/tonne - the highest point in seven years.
Skim milk powder - which has the second greatest weighting - gained 3.5 per cent to US$3302/tonne.
Among the other Fonterra reference products, butter spiked up by 13.7 per cent to US$5826/tonne and anhydrous milk fat gained 7.4 per cent to US$5929/tonne.
The only reference product to buck the trend was butter milk powder, which fell 0.3 per cent to US$3,144/tonne.
Last month Fonterra lifted its 2020/21 forecast farmgate milk price range by 20c/kg of milksolids to between $6.90 and $7.50/kg but warned higher prices would put pressure on its margins. The midpoint of Fonterra's range increased to $7.20/kgMS.
ASB, in a commentary, said prices had gone "ballistic" at the auction.
The bank said the magnitude of gains at recent auctions have been large enough that a figure in the $7.50 -$7.60 range was conceivable.
"Similarly, our opening forecast of $7.30 for the 2021/22 season could reach $7.40 -$7.50," ASB said.
As it stands, Fonterra's milk price is towards the top end of prices paid since Fonterra was established in 2001.
The record was $8.40/kg in the 2013/14 season.
The news coincides with data from Fonterra showing New Zealand production in the 12 months to January was steady - up 0.6 per cent over the previous corresponding period, and strong demand from China.
The upbeat auction precedes Fonterra's interim result, which is due on March 17.
Fonterra last month lifted the bottom end of its 2021 forecast earnings guidance and narrowed the range to 25-35 cents per share 20-35 cents.
Fonterra CEO Miles Hurrell. Photo / NZ Herald
Hurrell said then that there had been strong demand for the co-op's New Zealand milk.
He expected Fonterra's earnings performance to be heavily weighted to the first half of the financial year.
But he stressed that rising dairy prices over the co-op's first half had put pressure on its sales margins and that this would be seen through the second half.
Meanwhile, China's appetite for imported dairy product continues unabated.
The PRC's dairy import volumes increased by 18.6 per cent or 51,204 tonnes in December compared to the same period the previous year and rose by 10.9 per cent over the year.
Rabobank senior dairy analyst Emma Higgins said farmers needed to "buckle up" for a scramble for dairy product.
She said the auction result was all about demand from China but that there were many dynamics at play.
"The cost of producing milk in China right now is expensive. Feed prices in China – particularly for corn and soymeal – have hit multi-year highs.
"In response, the average Chinese milk prices for January 2021 sat just below record highs last experienced in February 2014.
"This has helped to ensure a price discount wider than the historical 5-year average for Oceania wholemilk powder prices compared to the Chinese domestic average milk."
