Farmers look to GDT dairy auction to back up milk prices

New Zealand milk supply is tipped to return to growth this season, and Fonterra expects a 3 per cent lift in production. Photo / David Kerr

This week's Global Dairy Trade auction is shaping up to be another firm one, lending more weight to the elevated farmgate milk price forecasts already in the market.

Whole milk powder - the key product for New Zealand producers - firmed in price by 2.6 per cent to $3111 a tonne at the last auction on July 5, and futures market pricing indicates another rise is possible at tomorrow's auction.

"We are suggesting that the market will be up because of the premium being paid in the existing futures contracts, relative to whole milk powder prices paid at the last GDT auction," said Nigel Brunel, director financial markets at OM Financial.

Brunel said the conditions for this season, which peaks around September-October, were favourable.

"It's looking like it will be a reasonably good season - the cows are in good condition, there's lots of feed around, and so far the weather has been relatively benign."

New Zealand milk supply is tipped to return to growth this season, and Fonterra expects a 3 per cent lift in production.

Bad weather affected the peak of the season last year, but an unusually long "shoulder" meant overall production, compared with the previous year, was down by only 1.1 per cent.

Federated Farmers chairman Chris Lewis said farmers were optimistic about the season ahead.

"All the big dairy companies that I speak to are all talking similar outcomes for the season, and all are cautiously optimistic, which is great," Lewis told the Herald.

This time last year, Fonterra's opening milk price was just $4.25/kg, in part reflecting whole milk powder prices around the low $2000/tonne mark.

For the season ahead, Fonterra has forecast a $6.50/kg milk price. The co-op's forecast earnings range for the 2018 financial year will be announced early next month.

Westland Milk, the second-biggest co-operative after Fonterra, has put itself back in the game with a forecast payout of $6.40 to $6.80/kg, after retentions for this season, after lagging the pack by about a dollar over 2016/17.

The Talleys-controlled Open Country Dairy has forecast $6.25/kg to $6.55/kg for this season.

In the South Island, Synlait Milk - which supplies alternative dairy company A2 Milk, has forecast a $6.50/kg milk price, up from $6.29 in 2016/17.

Among the smaller players Tatua, in prime Waikato dairy country, is in the midst of setting its forecast for this season, while Taupo-based Miraka has a $6.30 to $6.60/kg forecast range.

On the world scene, Rabobank said the milk supply taps were slowly being turned on. At the same time, the EU Commission was developing a programme to liquidate skim milk powder stocks built up during the slump.

At this week's auction, keen interest will be shown in whether China resumes as a presence in the market.

Rabobank said continued high dairy fat prices raised the possibility of substitution. "Some end users may be tempted to substitute dairy fats for cheaper vegetable oil alternatives."