Auction fall puts Fonterra's price under pressure

Dairy prices eased for the second time this year at the overnight GlobalDairyTrade (GDT) auction, putting more downward pressure on Fonterra's farmgate milk price forecast.

The GDT price index eased 1.4 per cent, following on from the 1.6 per cent decline at the first sale of the year on January 6.

Whole milk powder prices, the key component of Fonterra's milk price forecast, eased in price by 0.5 per cent to an average US$2188 a tonne. Another important product, skim milk powder, fell by 3.2 per cent in price to an average US$1835 a tonne.

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Futures market pricing had suggested the auction would be flat, with a weaker bias.

OpenCountry Dairy, New Zealand's second largest dairy processor after Fonterra has already reduced its milk payout by 30c to an average price of between $4.00-$4.30 per kg milk solids.
Fonterra is bound by legislation to review its forecast by March, although it may opt to look at it sooner.

ANZ expects Fonterra to reduce its milk price for 2015/16 toward the bottom end of its forecast range of $4.25-$4.50/kg.

"There could be a slight offset from a higher dividend due to a lower milk cost and smaller proportion of earnings being retained," ANZ rural economist Con Williams said.

"Nevertheless this will maintain cashflow pressures on farmers into at least early 2017," he said in a commentary.

Recent rainfall across many areas and high palm kernel imports suggested the supply outlook has improved for now, which could add additional product to GDT at some point, Williams said.

Commodities ranging from crude oil through to grains and meats have all been in decline, and global equity markets have also endured big losses in the first few weeks of 2016.

"It is difficult to see dairy buck the general bearish trend in commodities as the market remains in an oversupplied state," Chicago-based commodities specialist, HighGround Dairy said.