Dairy prices jumped at this morning's Global Dairy Trade auction, but will it mean higher farmgate milk prices?
Fonterra's current forecast has been pitched in a $6.30 to $7.30/kg range - with a $6.80 mid-point - but an adjustment is possible when the co-op releases its first quarter earnings update on Friday.
Dairy prices jumped by 4.3 per cent at this morning's auction, building on a 1.8 per cent gain at the previous auction last month.
Whole milk powder prices, which have the biggest bearing on Fonterra's farmgate milk price - shot up by 5 per cent to US$3,182 a tonne and well ahead of market expectations.
Skim milk powder prices - the second biggest influence - jumped by 3.6 per cent jump to US$2,889/tonne.
Butter prices continued their rebound, rising 3.8 per cent to US3,986 a tonne, and making it five consecutive auction price gains.
Westpac agri economist Nathan Penny said there was a chance of an upgrade by Fonterra at Friday's update.
"There is a fair chance that they will narrow the forecast range, if not lift the range outright," Penny said.
Westpac has forecast a $7.00/kg milk price for the current season, and for 2021/22.
Penny said a $7.00/kg milk price would allow farmers to spend on farm maintenance, fertiliser, debt repayment and to bank a profit.
"It's a healthy, middle-ground milk price."
Farmers will also take some confidence from whole milk powder futures prices, which are sitting comfortably above the important US$3000 threshold through to May, 2022.
Wholemilk power prices have been volatile throughout the year, mostly due to the Covid-19 pandemic, sinking to US$2,677/tonne in May.
Prices are now getting back to normal, Penny said.
"Looking over a longer period, dairy prices are normalising.
"All up, these moves indicate that the recovery in global dairy demand is on increasingly solid ground," Penny said.
Further price increases may be likely over 2021 as Covid-19 vaccines roll out and in-restaurant demand picks up.
"Looking to 2021/22 the risks are a little more balanced given the recent surge in the New Zealand dollar and the fact that Fonterra will have only limited hedging in place at this stage," he said.
Highly indebted dairy farmers will welcome stronger, more stable prices.
The Reserve Bank, in last month's financial stability statement, said dairy farmers appear to be taking a more cautious approach to long-term capital investment in light of the global economic recession and the ongoing consequences of Covid-19.
"Banks have been working with over-extended dairy farmers and encouraging them to de-lever, by taking advantage of favourable commodity prices and historically low interest rates to repay loan principal and reduce their vulnerability to another dairy downturn," the bank said.
However, there were still a number of dairy farms that remained financially vulnerable.
"This is particularly significant as some dairy farms remain highly indebted after experiencing two downturns in the last decade, and require a high milk price just to remain operational," the bank said.
Between 2003 and 2019, dairy debt has grown by more than 267 per cent while total overall loans grew in the agricultural sector at 192 per cent.
Debt has been the primary source of capital for dairy farms with debt per kg of milksolids growing from $9.48 in 2003 to $21.99 in 2019.
Since 2017, dairy property prices have fallen by 16 per cent and dairy farm sale volumes from 2019 are 30 per cent lower than in 2016 caused by a combination of factors including foreign buyers being blocked from the market and tighter credit.