What the GDT auction price fall means for Fonterra's milk price forecast

Dairy prices fell sharply at this morning's GlobalDairyTrade auction. Photo / File

A sharp fall in dairy prices has put the spotlight on Fonterra's bullish milk price forecast for the current season.

The co-op last month increased its 2022/23 forecast farmgate milk price range to $8.75-$10.25 per kg from $8.25-$9.75 per kg.

This increased the midpoint of the range by 50 cents to $9.50 per kg, which would be a record if it came to pass.

Economists said the 5 per cent fall in the Global Dairy Trade (GDT) index had put pressure on Fonterra's forecast but they stressed it was early days and that the weaker New Zealand dollar was providing something of an offset.

Moreover, world dairy supply remained constrained, which may limit the downside risk.

Westpac senior agri economist Nathan Penny put his $9.25 per kg forecast "under review" after this morning's fall on the GDT platform.

He said commodities prices generally had come off but that dairy by itself had declined due to some specific factors.

"It was a chunky fall," he said.

"Underpinning that has been that weakness in commodities globally if you look at oil prices and the like.

"Dairy is following those prices lower but, in dairy itself you can look at what Fonterra has done."

With Fonterra putting more powder up for auction, the market had assumed that it was previously-contracted product.

"You assume that those contracts have fallen through, which indicates that demand is not as strong as we thought it was.

"Hence prices have weakened overnight by a chunky amount, so that poses some risk to our forecast, and presumably you can say the same thing for Fonterra," he said.

Fonterra's milk price forecast is back in the spotlight. Photo / NZ Herald

Since March, whole milk powder prices have plunged by 25 per cent while overall prices are down 23 per cent.

"Dairy supply is still very tight - and that has not changed - but it does appear that demand is not as resilient as we thought a month or so ago," Penny said.

"Putting those two things together means that prices are lower and therefore the milk price is under pressure.

"The question for us is how long does this supply-demand weakness last and will prices recover."

Penny said it was clear that Covid lockdowns had hurt the Chinese economy over the June quarter.

Westpac expects the Chinese economy to rebound in the second half but from a lower starting point than it had previously expected.

"We still think dairy prices will recover but there is a degree of uncertainty around that," Penny said.

One offsetting factor had been the weaker exchange rate, which has dropped by US7.6 cents or 10.8 per cent, to US62.4c since April.

"Nonetheless, Fonterra's hedging means that they may not be getting the full benefit of that - the dairy price falls that we have seen over the last couple of months are quite significant," he said.

"The fall in the New Zealand dollar does not fully compensate for that when you factor in Fonterra's hedging."

ANZ agri economist Susan Kilsby is sticking with her $8.50/kg forecast, which is at the lower end of market forecasts.

"I've been holding to that on the expectation that we would see commodities prices come back, which is pretty much exactly what we have seen," Kilsby said.

She said it was still early days - the season having only begun last month.

"We are only in July and we have a whole 12 months ahead of us, so you can't argue it either way at this time of the season, but I have taken a more conservative line than anyone else."

Kilsby said tight supply will limit how far prices can come back.

She said the global economic slowdown was playing a part in driving prices down.

"In that environment, you would expect demand for dairy products to deteriorate, which is I think what we are starting to see now."

She said the auction reflected softer demand out of China - no surprise given the prevalence of Covid-19 lockdowns there.

At this morning's auction, whole milk powder prices, which have the greatest bearing on Fonterra's milk price forecast, fell by 5.1 per cent to US$3757 a tonne - back to levels not seen since last October.

The second most important reference product, skim milk powder, fell by 8.6 per cent to US$3709 a tonne.

Anhydrous milk fat and butter prices - which also have an influence on the milk price - were both off by 2.1 per cent to US$5580/tonne and US$5530/tonne respectively.

Since early April, the New Zealand dollar has dropped by US7.6 cents or 10.8 per cent to US62.4c.