At first blush, there might have been some cheering in the cowsheds at results from the latest Fonterra Global Dairy Trade auction, with prices up by an average 2.2%. But the ebullience would have become more subdued as the reality sank in that the rise in the NZ dollar against the greenback meant the price slipped by 0.5% in local currency terms. Moreover, with costs rising on the farm, maybe there wasn’t anything to cheer about.
Perhaps the only ray of light has been Fonterra’s decision to offer smaller amounts of WMP on the auction platform because of strong contract demand in conjunction with the expectation this season of flat milk supply.
And the auction showed demand is highest for food-service commodities, with butter up 4.7%, cheese up 2.9%, and SMP up 2.5%.
Still, the average price for WMP in lifting 1.5% to an average US$3803 (NZ$5305) a tonne is now 25% higher than at the same time last year.
Some economists argue that the results from the latest auction support their prediction that Fonterra’s payout this season could be a record.
NZX dairy analyst Stuart Davison pointed to the strong price gains across each contract period of each commodity to say:
“There is now little doubt that buyers are aware of how tight supply is expected to be, and are willing to pay the premium to secure volumes.The market doesn’t expect prices to ease from these price points in a hurry.”
Fonterra expects to pay farmers between $7.25kg/MS to $8.75 That’s ahead of its $7.54 payment last season.
The mid-point of the forecast – if realised – would result in Fonterra contributing more than $12 billion to the economy.
Analysts have noted NZ has started this season on the back foot as wet and cold weather dents milk production.
Milk production was also soft elsewhere, with weather impacting European production and Chinese and United States production constrained by high feed costs and limited feed availability.
Davison noted that North Asian buyers returned to their dominant position as the top purchasers at the latest auction.