Dairy payout below $5 a kg picked

Fonterra’s board is set to meet early next week to review the farmgate milk price forecast for 2014/15. Photo / Christine Cornege

Tomorrow will see the last GlobalDairyTrade auction before Fonterra releases its revised farmgate milk price forecast for 2014/15, and indications are that product prices will remain flat at best, say economists.

Fonterra's board is set to meet early next week and bank economists expect the co-operative dairy giant to revise its current $5.30 per kg of milksolids forecast for 2014/15 to sub $5 levels.

Prices have fallen by close to 50 per cent since February, driven mostly by excess supply.

ANZ bank economists said picking auction results had been a "lottery" of late, with a host of demand and supply side influences to factor in.

The bank expects the average winning price at Wednesday's auction to be about US$2600 a tonne compared with US$2561 a tonne at the last auction in mid-November.

Fonterra has said the price of wholemilk powder - the most important product group from Kiwi producers - would need to reach US$3500 a tonne by next March - compared with US$2400 at the last auction - in order for it to meet its existing $5.30/kg farmgate milk price forecast.

"New Zealand looks cheap compared with other sources for many dairy products, which at some point must start supporting prices," ANZ said in a commentary.

"The GDT auction holds risks that the New Zealand dollar will decline if global commodities weakness translates into further dairy declines," ANZ said.

"We expect something closer to $4.85, but the key here will be how long dairy prices remain low and what the New Zealand dollar does."

ANZ chief economist Cameron Bagrie said prices had fallen in recent auctions, despite Fonterra's attempts to drive "price tension" by offering less volume, and weakness in commodities markets was further dampening sentiment.

"It does not give us a lot of optimism about where dairy prices might be trading in the next two auctions," Bagrie said. ASB rural economist Nathan Penny said higher production had thwarted any possible price gains. "We don't expect to see much movement either way but that said, auctions are volatile from auction-to-auction."

Fonterra's milk production in the season to date is up by about 4 per cent on this time last year, and production in the United States and Europe has been similarly strong, so the increase in supply had prevented prices from improving, he said.

Last week, Westland Milk Products, New Zealand's second-biggest dairy co-operative after Fonterra, cut its forecast milk payout for the second time in four months, blaming global oversupply.

Economists have said farmers should be able to weather a low payout for the season, thanks to last year's high milk price, but two poor seasons in a row would put the sector under financial stress.

For the moment, farmers are still benefiting from last season's record payout from Fonterra of $8.50 a kg, which economists said would help to offset the low payout this year.

Dairy auction
*GlobalDairyTrade auction results - second to last for this year - are due tomorrow.
*Results hard to predict but prices expected to be flat generally.
*Fonterra says wholemilk powder needs to hit US$3500 a tonne for current $5.30/kg forecast to be met.
*Market expects Fonterra to revise farmgate milk price to sub $5 levels next week.