The overnight lift in dairy prices may have wiped out all pandemic-related falls, but Fonterra Cooperative Group is demurring on whether farmers can expect a higher payout.
The average price across all products climbed 8.3 per cent in the overnight Global Dairy Trade auction - boosted by a 14 per cent gain in whole milk powder - in the biggest increase for the index since November 2016. Whole milk power prices are now at US$3208 a tonne and 1.2 per cent more than the end of January.
The result was significantly higher than expected, with futures pointing to a more modest increase of 4.8 per cent in whole milk powder prices ahead of the event.
It was a "great result overnight, exceeding all expectations, especially considering that volumes are beginning to increase as we approach the peak of the season," Fonterra chief executive Miles Hurrell told BusinessDesk. Fonterra forecasts a farmgate payout of $5.40-to-$6.90 per kilogram of milk solids in the current season.
While Hurrell is upbeat about the overnight auction, he's cautious about the future.
"While there is improved sentiment in the market, most economies are still being impacted by Covid-19 and demand remains difficult to predict. At this early stage of the season, it is too soon to predict any potential impact on the forecast farmgate milk price," he said.
The lift comes as lockdown restrictions ease in major dairy buying nations, such as China.
"People didn't get as bearish about food to begin with and, now things are improving, they are like, okay, let's get back to our normal mentality on food," said Nathan Penny, an agri economist at Westpac Banking Corp.
Buyers weren't deterred by supply starting to ramp up, Penny said, noting that production peaks in September and October, which should bring down the price.
"Once we get to September, there will be nearly double the amount that was on offer last night, so buyers can wait, but obviously some of them didn't want too," he said.
While he expects some of the gains to be pared back once there is more supply on offer, Penny said the lift presents an upside risk to Fonterra's payout.
Westpac is forecasting that Fonterra will pay $6.50/kgMS, although Penny noted it's very early in the season.
"We have 10 more months to go and we are in the biggest recession in our lifetime."
Regardless, whole milk powder prices at US$3200 is a "very solid start to the season."
Nigel Brunel, a director of institutional commodities at OMF, said the lift surprised him, and could mean Fonterra pays more to its farmer-shareholders.
"New Zealand is in a good space, effectively Covid-free," he said.
ASB Bank is now reviewing its $6.50/kgMS forecast, said economist Chris Tennent-Brown. Previously, the bank's economists highlighted downside risks, but "recent price movements and today's outsized gains flip the risks around."