Will auction dairy jump mean farmer payout hike?

Photo / Sarah Ivey

Another strong GlobalDairyTrade auction sent economists back to their spreadsheets today, causing some to revise up their farmgate milk price forecasts, but they said prices still have a way to go before farmers can reach break even.

Dairy prices surged sharply higher for the third time in a row at the latest GlobalDairyTrade auction, GDT price index rising by 16.5 per cent since the last sale early this month.

Whole milk powder prices, the key component of Fonterra's farmgate milk price, put on the strongest performance of all the product groups by jumping by 20.6 per cent to an average price of US$2,495 a tonne. Whole milk prices have now rallied by 56.9 per cent since hitting a GDT record low of US$1,590 in mid-August.

While this morning's gains looked encouraging, prices have still have a long way to go before Fonterra's $3.85 per kg of milksolids milk price forecast - which rests on wholemilk powder prices reaching US$3,000 a tonne next year - can be realised.

Nigel Brunel, Director - Financial Markets OM Financial, said reduced volumes on the GDT platform and a perceived reduction in the season supply were having an impact.

"But it really underscores the extreme volatility that exists in milk as we are yet to see the outcome of our season when offshore supply still remains high," he said.

"This market looks overdone to the upside in a similar way it looked overdone to the downside a few short weeks back," he said.

See recent changes in world dairy prices here:

ASB Bank revised up its farmgate forecast to $5.00 a kg from its previous estimate of $4.50, ANZ to $4.25-$4.50 from $3.75-$4.00/kg and AgriHQ's theoretical farmgate milk rose by 46c to $4.65 Westpac kept its forecast at $4.30 but said "risks lie to the upside".

The latest rise in prices follows a statement by Fonterra last week reaffirming its view that milk collection will be lower this season by 2-3 per cent, which analysts said was looking conservative, particularly if the current El Nino weather pattern results in serious drought.

Analysts said the general themes of overproduction and slack demand remained to the fore.

"I don't think things are fundamentally different today than they were a few months back when prices moved lower," Jon Spainhour, a partner in Chicago-based Rice Dairy.

Spainhour said there was evidence that China - the world's biggest dairy importer - was back in the market, but that he did not expect to see a strong influence from that country for a while.

ANZ's rural economist Con Williams said prices would "get a bit bumpy" from here on.

Fonterra expects this year's production to fall by 2 to 3 per cent but market expectations but that forecast is looking more and more conservative by the day. ANZ expects to see production fall by 5 per cent and Rabobank is looking at a 10 per cent decline.

Williams said a milk price in the mid-$4/kg would still be well below par. Cashflow for the 2015/16 financial year is still only around the mid-$3/kg which has seen most businesses require seasonal finance of around $1-$2/kg, he said. "So while the bottom has been seen, things will remain tough down on the farm for some time to come."