Upward pressure goes on Fonterra’s milk price forecast after strong GDT auction

Another strong GDT auction may elevate Fonterra's current milk price forecast.

Upward pressure has gone on Fonterra’s farmgate milk price after this morning’s Global Dairy Trade auction registered a big gain for the fourth time in a row.

There were big price rises in the key products, with whole milk powder firming 4.2 per cent to US$3059/tonne, skim milk powder gaining 4.3 per cent to US$2659/tonne, and anhydrous milk fat jumping by 7.1 per cent to US$5310/tonne.

Prices overall were up by 4.3 per cent, despite China - usually the biggest buyer - not stepping up to a large degree.

Futures pricing had suggested that the twice-monthly auction would be strong.

Fonterra last week raised its 2023/24 forecast milk price range to $6.50 - $8.00 per kgMS, with a new midpoint of $7.25 per kgMS, up 50 cents from its previous forecast.

Chief executive Miles Hurrell said at the time the improved outlook reflected both supply and demand dynamics.

The co-op kicked off the current season with a $7.25 to $8.75 per kg range, with a $8.00 per kg midpoint, but two sharply weaker auctions in August brought with them two big milk price downgrades.

October is usually when New Zealand’s milk production is at its strongest.

“We are at the time of year when auction volumes are at their largest, and it’s relatively early in the season, but those two things add up to positive signs for the milk price,” Westpac senior agri economist Nathan Penny said.

“It’s early days, but the indications are that in terms of its range, it says that the top half is in play,” he said.

Penny, who is now picking a $7.25/kg milk price, said it was clear that market sentiment had changed.

He added that the possibility of drought arising from the current El Nino weather pattern may also be starting to have an impact on prices.

As always, the big question remained as to the appetite for dairy in China.

“We have seen Middle East buying - particularly heavily in recent auctions,” Penny said.

“But what we have not seen is a material change in Chinese buying.

“Are we seeing a change in demand from Chinese consumers? The jury is out on that.”

Rabobank dairy analyst Emma Higgins said the result helped to underpin Fonterra’s current forecast.

“On a spot basis, this result supports upward pressure in the forecast farmgate milk price. However, cautious optimism could still apply here as China’s purchasing volumes are still below historic averages,” Higgins said.

Whole milk powder prices have risen by 20 per cent in the last two months, and are clawing their way back from a five-year low hit in August.

The highest price ever paid by Fonterra for its milk was $9.30/kg in the 2021/22 season.

Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.