Fonterra price rise: 'Don't bet the farm'

Photo / Sarah Ivey

A leap of almost 26 per cent in wholemilk powder prices on Fonterra's latest online global auction has delivered a mixed message and economists say it would be unwise to bet the farm on the upswing continuing.

The auction, which saw the average price of wholemilk powder jumping to US$2301 per metric tonne from US$1829 last month was a welcome relief from the pattern of a rising Kiwi dollar and weak product prices, but the extent of the rise underlined the volatility of world commodity prices, they said.

The kiwi dollar muscled up by around half a cent on the news of the auction result, said Bank of New Zealand chief economist Tony Alexander, helping it to another 10-month high.

The auction result confirmed "extreme volatility" in commodity prices, he said. "I think you would look at the numbers and say there is an upward trend but I don't think there is a reasonable basis to say where we will end up in 12 months. It's just way too volatile."

The New Zealand dollar was at US67.20c at 5pm yesterday, having reached as high as US$67.50c.

But while the $17 billion NZ dairy industry would have viewed the dollar's reaction negatively because a strong currency is the biggest suppressor of milk payout to farmers, importers will welcome the dollar's increased buying power.

Westpac senior economist Doug Steel said the auction result was a pleasing boost for the economy. "It has lifted the threat we have seen in recent months of the dollar rising and our product prices overseas remaining weak. The dollar lifting [yesterday] means in theory purchasing power goes up."

Steel said New Zealand had a "bit of a mindset" that a higher dollar was bad.

"In fact it's probably good in the sense of an income boost. It means every dollar you have can buy more stuff, as long as the dollar is going up for the right reasons and the right reasons could include an increase in the price of products we sell overseas or productivity gains at home.

"It's risky looking at one side of the equation. If the dollar goes up that's bad for payout in isolation but if the dollar has gone up because product price has gone up that's pretty neutral on payout, but means tractors and fuel and fertiliser is cheaper."

The Fonterra auction price was the highest achieved on its internet sales platform since November, but still down around 47 per cent on when the dairy giant started the monthly auction just over a year ago.

Fonterra said the result was indicative of market volatility. Director of commercial and strategy for Fonterra trade and operations Nigel Kuzemko recalled a 16 per cent jump in the March auction price which later turned south, and said it was difficult to predict where prices would go in the next three, six or even 12 months.

The currency had a "major"impact on dairy payout when it came time to convert Fonterra's US revenue into Kiwi dollars, he said. But it was difficult to say if the latest strengthening of the New Zealand dollar would wipe out the benefit of the auction price because only 10 per cent of Fonterra's total volume was sold this way, Kuzemko said.

Dairying is responsible for more than 27 per cent of New Zealand's export earnings.

The BNZ's Alexander said caution was advisable. "We would not extrapolate this 26 per cent rise into something for the next auction or the ones after that. I don't think any farmers are likely to get overly excited about it. They know this season's payout is locked in somewhere close to $4.55 [per kg milksolids]."

That Fonterra was able to reconfirm its $4.55 payout forecast surprised some people, given the dollar strengthening, he said.

Kuzemko said Fonterra customers would be "challenged" by the 26 per cent price increase, but those who had taken up its new risk management offer would be "quite relaxed today and those who didn't are maybe scratching their heads".

The offer, unique to Fonterra, the world's largest exporter of dairy products, enables customers to buy forward supply at a fixed price. "For example if someone wants to buy wholemilk powder for a six month period we can fix the price for that period as long as we understand the risk in the price associated with that. Then we add a risk premium and so charge for the risk and there's a profit element as well."

Kuzemko said the offer was still "very new in the marketplace" and could not comment on uptake. It was still unclear how last week's increase by the US of its protectionist intervention price for skim milk powder would impact on markets. The US raised the intervention price from 80c a pound to 92c a pound.