Synlait Milk’s updated forecast milk price— now $7.25kg/MS, up from $7kg/MS —renews pressure on Fonterra to hit the upper limit of its own forecast.
For the industry as a whole, the higher milk payouts underline the strong global demand for NZ dairy products. And they provide some welcome sunshine into many of the county’s dairy sheds.
When Fonterra in December flagged it was aiming for the midpoint of its $7 to $7.60 forecast range, it said that a $7.30 milk price would be the fourth highest in its nearly two decades of operation.
That $7.30kg/MS is comfortably ahead of Dairy NZ’s estimate of break-even for Fonterra’s suppliers of $5.95.
But now Synlait is saying is it has raised its forecast payout on the back of higher than expected commodity prices at the end of 2019. It believes those will hold in the medium term as supply and demand continue to be evenly matched.
While Synlait’s move puts pressure on Fonterra, the difficulty for the giant co-op is that the higher it lifts the payout, the more it increases its own input costs and thus puts a brake on its own drive to get back into the black after last year’s loss.
With steady gains in the first two Global Dairy Trade auctions in 2020, the GDT price index has recovered the surprise 5.1% slippage in the run-up to Christmas.The average price at the latest auction rose 1.7% to $US3434 a tonne. That is well ahead of the $3255/tonne average price back in August.
The question is whether the upward trend will be sustained. Analysts have firmed up their own forecasts, because of the prospect supply may not match demand.
The forecasts, if confirmed, would mean the best returns for dairy farmers since the record season of 2013/14, when farmers were paid more than $8 a kilo.
The price of wholemilk powder at the latest GDT auction, which strongly influences the payouts for local farmers, rose 2.4% $US3233 a tonne. Butter prices also firmed, reaching $4250 a tonne, on the back of strong demand.
But even if the industry is looking for prices to consolidate around the current level it doesn’t want to experience the boom-and-bust effect which hit after the record 2014 payout. In 2014/15 the payout slumped to $4.40kg/MS, and the following season to $3.90.
Too many within the industry are still recovering from the M.bovis disease which afflicted several herds and left many farms struggling to survive.
And as well dairy farmers have had to confront the depressive market influences of environmental compliance costs, scarce labour quality and availability and most significantly the decision by the Australian-owned banks to reduce their lending exposure to dairying.