“The volumes that Fonterra loaded on the 12 months’ forecast for GDT last week has quite bearish news for the market,” Davison said.
“And the futures market reacted by losing a fair chunk of value over the last two trading sessions,” he said.
At the last auction, whole milk powder prices - which have a big bearing on Fonterra’s farmgate milk price - were down 8 per cent to an average US$2864 a tonne.
Skim milk powder, the second biggest reference product - dropped by 1.4 per cent to US$2454 a tonne.
Fonterra last week increased its forecast total offer quantity on the Global Dairy Trade - an extra 20,000 tonnes for whole milk powder and 5000 tonnes for skim milk powder over the coming year.
“Given recent dairy demand slumps, an increase in volumes on the platform may have further negative impacts on commodity prices,” NZX said.
Davison said whole milk prices in the region of US$2600/tonne were on the cards tomorrow “which is quite bearish considering where we were two weeks ago”.
“China is still flush with milk. There is not a lot of consumer demand and macro conditions in China are not conducive for consumer demand,” he said.
“We know the market is in a bearish term, so it’s not looking good,” he said.
On the world stage, Fonterra had been successful in the Algerian government’s quarterly tender process for milk powder.
Davison said Algeria had helped to prop up the market over the last 18 months or so, which had been “handy”.
While the short-term outlook for the market appeared bleak, the signs were that next season would be better.
“There are expectations that things will improve going into 2024/25 season, purely because global supply and demand will balance out by that point,” he said.
NZX dairy analyst Alex Winning said forecasting over the past six months had been quite difficult because the markets on the derivatives side and the physical side had been at odds.
“However, the futures market is pushing for an easing of those front four contacts,” she said.
“Those [Fonterra] volumes increasing is definitely going to have an impact on the direction of the auction.”
Like Davison, Winning was more optimistic about next season, when she expects whole milk powder and skim milk powder to exceed US$3000 a tonne.
And data out of China for June showed production there was starting to turn down.
In futures trading, the August 2023 whole milk powder futures contract settled at US$2,710/t yesterday, having eased over the past couple of weeks.
This suggests the market is expecting whole milk powder prices to decrease 6.1 per cent at tomorrow’s auction.
The August 2023 skim milk powder futures contract settled at US$2,390, indicating a 3.3 per cent decline.
Fonterra last week cut its 2023/24 season forecast farmgate milk price range to $6.25 - $7.75 per kg of milk solids, with a midpoint of $7.00 per kg - well short of break-even for many farmers.
Prices for most of New Zealand’s main commodities - dairy, meat and logs - have been weak due to soft demand from China, the country’s biggest export customer.
Fonterra chief executive Miles Hurrell said the co-op’s revised forecast range reflected ongoing reduced import demand for whole milk powder from China.
The milk price is the main source of income for dairy farmers, but Fonterra’s shareholder suppliers at least some offset in the form of what is expected to be a strong dividend for the 2022/23 year.
The co-op expects to end the year at the top end of its forecast range of 65-80 cents per share.
It also expects to pay a full-year dividend at the top end of its dividend policy, which is 40-60 per cent of normalised earnings.
Fonterra’s result is due in September.
This week, Fonterra will pay 50 cents a share to farmers - being the proceeds from the sale of Chile’s Soprole.
In addition, Fonterra will soon embark on a $50m share buy-back underway, which should be supportive for the share price.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
