Price spike not enough

Fonterra has imposed its farmgate milk price forecast of $4.70 kg/milk solids.

Business writers Fran O'Sullivan and Alexander Speirs call the shots here every Thursday.

Rural confidence would have received a small boost with the news that the GlobalDairyTrade price index posted a small spike of an average 3.6 per cent in the year's first auction.

Many of the world's leading commodities ranging from oil through to iron ore and food commodities like dairy milk powder took a punishing in the latter months of last year.

What's notable about the latest auction is that gains for butter and buttermilk powder led the overall average rise to US$2709 ($3500) a tonne from US$2609 in December. But the price spike was also based on lower volumes with just 33,669 tonnes sold, down from the last December auction of 35,390 tonnes.

Farmers will be hoping demand for high quality proteins will result in the milk powder price recovering over time -- as it should -- but maybe not to recent records levels in the medium term.

But at this week's auction, skim milk powder was up 2.8 per cent to US$2386 a tonne, and whole milk powder rose 1.6 per cent to US$2307 a tonne.

The whole milk powder price is still way, way short of the long-run average of US$3500 a tonne for the dairy commodity, which is where Fonterra expects the price to ultimately recover.

But, in the meantime, dairy farmers' pay packets are set to be squeezed as Fonterra imposes its farmgate milk price forecast of $4.70 kg/milk solids for the season.

But the lift in the price index, although slight, will boost optimism that the price will recover over time.

Perversely, Westpac has foreshadowed that the price might bounce back earlier due to cuts in production by some farmers saving on feed costs and impending drought in parts of the country.

ANZ also expects demand to increase as the Chinese economy picks up and consumers have more money for high quality imported proteins.

It's important to note that the Chinese buyers stayed away from the auction late last year while inventories were run down within China. This, along with the Russian uncertainties and increased supply in the Northern Hemisphere (particularly Europe), played a significant role in the weakening of the index.

In the meantime, farmers who are Fonterra shareholders can look forward to a forecast cash payout of $4.95 to $5.05 for 2014/15, which includes the estimated dividend of 25-35 cents a share.

The results of the latest dairy auction confirm that Fonterra is on the right track pushing higher up the value curve with its products. The biggest gains in prices were registered in such areas.

We'll take a more in-depth look in next week's column at the challenges and opportunities facing the sector.

Fran O'Sullivan is a business columnist for the NZ Herald, and Alexander Speirs (right) is a business journalist for Herald Business Reports Dairy farmers hoping recovery will come soon despite rise coming on lower volumes of product.