Pressure building on Fonterra's milk price

Fonterra's season peaked on October 26 at 82 million litres. Photo / Getty Images

Pressure is building on Fonterra's farmgate milk price as increased production led to the fourth drop in a row at the latest Global Dairy Trade auction.

Fonterra's forecast, which under law has to be reviewed every three months, stands at $6.75/kg of milksolids.

Most banks have lowered their forecasts to around $6.25 to $6.50/kg.

A milk price around that level would not spell doom for dairy farmers, as it would still be comfortably above DairyNZ's most recent estimate of break-even of $5.20 to $5.25/kg.

ASB rural economist Nathan Penny said most farmers would be making money at above $6.00/kg, and a 6.50/kg milk price would still be high historically.

Penny said a more moderate milk price would add some balance to the market — particularly as high prices tend to encourage farmers to increase production.

At today's auction, the GDT price index fell by 3.4 per cent and the average winning price came to US$2970 a tonne.

The weakness was broad-based, with the largest falls in casein, down 12.6 per cent, skim milk powder, down 6.5 per cent and butter, down 5.9 per cent.

Whole milk powder prices — which have the greatest bearing on Fonterra's farmgate milk price — fell 2.7 per cent to US$2778 a tonne, and the declines were across most of the contract periods through to April next year.

Since August 2, whole milk powder prices have fallen by 12 per cent.

"It is clear the market is nervous about rising global supply," said ANZ senior economist Phil Borkin.

"European supply is increasing on the back of higher farmgate prices and favourable seasonal conditions, and local supply is improving too."

Borkin said whole milk powder prices should now find support at around current levels.
"Ultimately, it sets the scene for Fonterra to downgrade its milk price forecast for 2017/18 early next month to close to our current forecast of $6.25-$6.50/kg."

Analysts said worries about increased production — both in New Zealand and in Europe — have started to weigh on prices.

Dairy Companies Association of NZ data out last week showed local dairy production kicked up by 2.9 per cent in October — the peak of the season.

Fonterra's season peaked on October 26 at 82 million litres, up 1 per cent on the previous season's peak of 80 million litres.

In October Fonterra lowered its forecast annual collection from 1.575 billion kg of milksolids to 1.54 billion kgs, which would be a 1 per cent increase on the previous season.

Rabobank dairy analyst Michael Harvey said the general sentiment in global markets remains bearish.

"With farmgate milk prices across the export region above breakeven, milk production is gaining momentum," he said.

European data this week showed EU milk deliveries were up 3.7 per cent in September — the strongest growth in 18 months.

ASB's Penny said New Zealand production had rebounded sooner than the bank had expected.

"With NZ production much-improved and EU production already firm, we factor in this better global production outlook into our milk price forecast.

"All up and along with the weak run of recent auction results, we trim our 2017/18 milk price forecast by 25 cents to $6.50/kg," he said.

The co-operative's current $6.75/kg forecast for this season compares with $6.12/kg of milksolids in the 2016/17 season.

Farmgate milk prices slumped to $3.90/kg and $4.40/kg respectively in the two preceding seasons, requiring Fonterra to offer soft loans to help farmers through the downturn.