Payout lift prospects fall as world dairy prices drop 7.4pc

Wholemilk powder prices, the key product for determining Fonterra's farmgate milk price, fell by 8 per cent last night. Photo / John Stone.

The chances of an upgrade in Fonterra's $4.60 per kg farmgate milk price forecast became more remote today after dairy prices fell by 7.4 per cent at the GlobalDairyTrade auction.

Wholemilk powder prices, the key product for determining Fonterra 's farmgate milk price, fell by 8 per cent to US$2453 a tonne - well short of the US$3000 required to deliver on its current forecast.

Another key product, skim milk powder, also fell by 8.0 per cent, to US$2018 a tonne.
Declines were across the board, with butter milk powder dropping by 9.4 per cent to US$1844 a tonne and rennet casein falling by 11.2 per cent to US$5469 a tonne.

The market been a rollercoaster in recent months. Prices firmed dramatically over August and September but fell by 3.1 per cent at the last sale October 21.

Fonterra's present forecast, which will be reviewed at the end of this month, is well short of the $5.30 a kg required for most farmers to reach breakeven.

At this morning's auction, regular grade whole milk powder offered by Fonterra, for January 2016 delivery, failed to move from its starting price - which was 15 per cent lower than the previous auction price.

The NZX dairy futures market showed a flat outlook for dairy commodities through to the end of the 2015-16 dairy season and wholemilk powder prices are now only expected to reach US$2800/tonne by July 2016, AgriHQ dairy analyst Susan Kilsby said.

"The current outlook for the dairy markets means it is now unlikely Fonterra will be able to lift its farmgate milk price from its current forecast of $4.60/kg," she said in a commentary.

There is ample supply of dairy product available in the global market and buyers generally have plenty of stock on hand so there is little urgency for them to secure additional stock, she said.

The reduction in milk being produced in New Zealand was being offset by European dairy farmers producing more. Until global milk supplies drops further, prices were likely to remain subdued.

Part of the weakness at the auction as put down to the market adopting a "wait and see" approach as Fonterra looks to introduce a new classification for both skim milk powder and whole milk powder in the first December auction. This new product is expected to have a much shorter age profile of 90-120 days.

For dairy farmers, the concern remains that prices are still quite someway below what Fonterra flagged (US$3,000/tonne), ANZ rural economist Con Williams said.

"All up it suggests cash-flow will remain tight for dairy farmers into at least the middle of next year and conservative budgets will continue to dominate as market pricing moves more back into line with our current milk price range of $4.25-$4.50/kg," Williams said.

Derivatives specialist, OM Financial, said the fact that wholemilk powder futures continued to trade at a discount to GDT following the auction suggested there further price weakness was to come.

The auction result drove the Kiwi dollar down to US66.6c from US$67.0c just before the auction, but the currency quickly picked up the lost ground later in the morning.