Global dairy prices rise, hurrah – but so did the Kiwi dollar, and farm costs are climbing, too

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.