Fonterra forecast set to fall short

Latest milk price figures indicate dairy farmers should expect smaller payout per kg than in previous years.

Fonterra's $6 a kg farmgate milk price for 2014/15 looked more and more like a pipe dream after last night's Global Dairy Trade auction.

Rural economists said the forecast was more likely to be in the mid to low $5 a kg of milksolids mark after the Global Dairy Trade price index remained unchanged, despite slight gains in some product prices.

The price of the two most important products for local producers - wholemilk powder and skimmed milk powder - gained by 0.6 per cent and 0.9 per cent respectively.

"While Fonterra have been optimistic of a bounce back, given recent auction results it is difficult to see them being able to hold this next week," ANZ rural economist Con Williams said.

Economists said current prices would make it difficult for Fonterra to persist with its $6 a kg forecast next Wednesday, when the co-operative releases its annual result.

ASB Bank yesterday revised its forecast down from $5.80 to $5.30 a kg. Several other banks have adjusted their forecasts to the low to mid $5 mark. Yesterday's auction comes as production ramps up to a seasonal peak in a month's time.

The impact of the Russian import ban and weaker Russian dairy demand were compounding other factors pushing down dairy prices, such as very strong global dairy production and the temporary dip in Chinese demand, ASB said.

Some commentators had expected New Zealand could benefit from the ban, because of its exemption. "As it turns out, markets have anticipated that extra European milk, in particular, will hit markets soon," ASB rural economist Nathan Penny said. "Moreover, Russian health authorities have yet to approve New Zealand dairy factories for export to Russia as a consequence of last year's Fonterra contamination scare."

The combination of factors had pushed the prices down for key European Union exports such as cheddar and skimmed milk powder over recent auctions, with New Zealand producers "caught in the crossfire".

The New Zealand dollar is helping to buffer lower auction prices. However, NZ dollar falls are still dwarfed by the dairy prices. The dollar has dropped from a near record of over US88c back in July to around US82c yesterday.

ANZ's Williams said the price levels for the products that make up the farmgate milk price, and the decline in longer-dated contracts for milk powder, were the biggest areas of concern arising from the latest auction.

The current price levels and Fonterra's assumed NZ dollar hedging position translated into a milk price around the mid $4/kg mark - lower than the cost of production for many farmers.

The biggest falls at last night's auction were registered for butter milk powder, which dropped by 6.9 per cent, and cheddar, which fell by 6.5 per cent. Butter prices fell by 2.5 per cent and anhydrous milk fat gave up 2.2 per cent.

Federated Farmers dairy chairman Andrew Hoggard said there were encouraging signs from the auction result.

"While global milk production is still feeding into the market, I have a hunch we're close to or at the bottom but there's a heck of uncertainty out there."