The last Global Dairy Trade auction for 2019 turned out to be a fizzer, with prices for whole milk and skim milk powder both falling sharply.
Analysts were at loss to explain why overall prices fell by 5.1 per cent since the last sale on December 4, particularly since demand appeared to be strong at a time of either flat or declining production in many of the world's key dairy producing countries.
However, some said it may have been due to Fonterra putting a higher-than-normal level of product up for sale.
READ MORE:
• Fonterra's plan for a $1b Indian business
• Shrinking NZ milk pool plays into Fonterra's hands – Hurrell
• Fonterra rivals fear dairy giant will get leg up from law overhaul
• Fonterra intends relocating 160 Auckland staff from HQ to Takanini
Fonterra said last week said it would lift the offer quantity for whole milk powder (WMP) at the auction by 1,000 tonnes, while the 12 months forecast quantity for WMP increased by 13,000 tonnes for the period between January and April 2020.
The offer quantity for skim milk powder (SKM) increased by 340 tonnes while the 12 months forecast quantity for SKM lifted by 4,560 tonnes between January and May 2020.
Rabobank dairy analyst Emma Higgins said this morning's sharp decline appeared to be the result of higher volumes coming onto the market as Fonterra looked to capture better prices.
"It's more to do with that than the fundamentals changing," she said. However, she said volume-related price weakness could flow into January.
Rabobank has a $7.60/kg farmgate milk price forecast for the current season - the top end of Fonterra's $7.00 to $7.60 per kg range - and Higgins said the forecast would not change as a result of this morning's auction.
WMP prices - which have the greatest bearing on Fonterra's farmgate milk price - fell by 6.7 per cent to US$3099 a tonne, contrary to futures market pricing which suggested a slight fall, and reversing the last three months of gains.
Skim milk powder prices, which are also relevant for the farmgate milk price, fell by 6.3 per cent to US$2867 a tonne.
ASB senior rural economist Nathan Penny said prices for WMP over the last quarter were on average 20 per cent higher than the final quarter of last year.
The season is just past its peak, and about 60 per cent of 2019/20 production has already been sold.
"It remains somewhat of a puzzle as to why prices fell overnight," he said in a commentary.
"Fundamentally, nothing has changed in global dairy markets," he said.
New Zealand global dairy supply remains tight and there are no signs that global demand has shifted, he said.
The number of China-based buyers overnight was similar to previous auctions.
Penny also suggested Fonterra's increase in auction volumes may have driven the fall.
"However, we point out that this represents a switch from off-auction sales to on-auction sales only," he said.
"In other words, there has been no change in overall supply."
Penny said this morning's price weakness was likely to be temporary.
Early this month, Fonterra lifted its farmgate milk price mid-point to $7.30 a kg, which would be the fourth-highest price in its history.