Weak GDT auction casts a shadow over 2020/21 milk price

Dairy prices fell at the latest Global Dairy Trade auction, reversing gains made in early April. Photo / File

Dairy price gains made earlier this month were wiped out at this morning's auction, the Global Dairy Trade price index falling by 4.2 per cent and taking the market back to where it was 16 months ago.

All products on offer weakened, except cheddar and lactose, which rose by 1.9 and 12 per cent, respectively.

Whole milk powder prices, which have the greatest bearing on Fonterra's farmgate milk price, fell by 3.9 per cent to US$2,707/tonne, and back to where they were in January, 2019.

Skim milk powder - the second biggest "reference" product for Fonterra, fell by 4.9 per cent to an average price US$2,380/tonne.

The largest fall in the main commodity groups was anhydrous milk fat (AMF), which dropped by 7 per cent to US$4,083/tonne. Regular grade AMF to ship in June dropped by 15 per cent.

Compared to the equivalent event last year, volumes were also up, except for butter, which was down slightly.

"Demand therefore seems to have been reasonably strong; however buyers were evidently not willing to accept higher prices," NZX senior dairy analyst Amy Castleton said in a commentary.

Economists have revised down their 2020/21 milk price expectations due to the disruption caused by the Covid-19 pandemic.

Rabobank is predicting just $5.60 a kg of milksolids for the upcoming season because of the likely impact on the market of the pandemic, while most others predict a $6.30 to $6.50/kg milk price.

At the previous auction on April 7 prices gained, despite the futures market pointing to a fall. The New Zealand dairy season ends on May 31.

ASB senior rural economist Nathan Penny said it looked like negative sentiment in the oil markets had spilled over into dairy.

Some of Fonterra's key markets are in the oil producing parts of the world, so low oil prices can means can sometimes put downward pressure on dairy prices.

The weak dairy auction result follows the plunge in oil prices this week

The oil price weakness centres on a lack of immediate US capacity to store oil, with futures pricing for June still positive.

Penny said this suggested that both some of the oil price weakness and the weak dairy auction result would prove temporary.

"Nonetheless, these developments add to our caution on the global dairy market outlook," Penny said in a commentary.

Both wholemilk powder and overall dairy auction prices are down around 15 per cent since the Covid-19 outbreak began to impact on dairy markets from February.

Only minor adjustments are expected to be made to Fonterra's $7.00 to $7.60 forecast for the current season, which ends on May 31, but the GDT auction has cast further doubt on the prospects for 2020/21.

"For now, we retain our $6.50/kg forecast, but note the increasing downside risks and suggest that farmers start contingency planning for the possibility of a sub-$6.00/kg milk price for the 20/21 season," Penny said.

Fonterra will issue its 2020/21 forecast late in May.