Dairy prices jumped at the global auction overnight to touch a fresh eight-year high, prompting speculation that forecast milk payments to farmers could hit new records.
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123RF Global prices for dairy products hit an eight-year high at auction, and futures market pricing suggests they could go higher yet.

The Global Dairy Trade price index rose 4.1 per cent to 1455, its highest level since February 2014. That followed a 4.6 per cent gain at the previous fortnightly auction.

The average price for whole milk powder, which has the most impact on what farmers are paid, gained 5.8 per cent to US$4324 (NZ$6394) a tonne, and is sitting 25 per cent higher than at the same time last year. Whole milk powder gained 5.6 per cent at the previous auction.

Fonterra, the world’s largest dairy exporter, last month lifted its forecast milk payment to farmers for this season to a record level as tight milk supply in New Zealand and overseas underpins demand. The latest strong auction result has prompted economists to speculate that milk payments could move higher still.

NZX dairy insights manager Stuart Davison said it was another “incredible” auction result, with prices lifting for all commodities on offer.

“Buyers recognise that global milk supply will continue to be constrained in the short term, while consumers continue to demand dairy.

“There is little doubt that a second 4 per cent plus auction result will push New Zealand farmgate milk price forecasts higher” and help buoy expectations for next season’s forecasts, he said.

“When looking at the futures forward curves of each dairy commodity, it would seem there are another few auctions of price gains yet to come, with some lofty expectations from the market yet,” he said.

Fonterra last week lifted its forecast milk payment to farmers for this season to a record level of between $8.90 and $9.50 per kilogram of milk solids, which it expects will contribute $13.8 billion to the economy.

The midpoint of the range, which farmers are paid off, increased to $9.20 per kgMS, which would be the highest level since Fonterra was formed in 2001. The co-operative paid farmers $7.54 per kgMS last season, and its previous record was $8.40 per kgMS in the 2013/14 season.

Westpac senior agri economist Nathan Penny on Wednesday raised his forecast by 50 cents to $9.50 per kgMS, which is at the top of Fonterra’s range.

Penny lowered his forecast for New Zealand milk production as farmers have been hit by bad weather and surging costs. He now expects milk production to fall 3 per cent for the season, a bigger decline than his earlier prediction of a 1.5 per cent fall.

“This season, the weather has conspired to slam the brakes on New Zealand production,” Penny said. “First, winter and spring were either wet or cold or both in many parts of the country. Now, a dry summer, particularly in the Waikato, has added to the production woes.

“Moreover, with costs sky-high (including for feed) farmers don’t have the incentive to increase production that one might normally expect given the record-high milk price,” he said.

Penny expects Fonterra to pay $7.50 per kgMS next season.

Westpac senior agri economist Nathan Penny lifted his forecast for milk payments to farmers this season to the top of Fonterra’s range.
SUPPLIED Westpac senior agri economist Nathan Penny lifted his forecast for milk payments to farmers this season to the top of Fonterra’s range.

ASB economist Nat Keall lifted his forecast for this season by 15c to $9.25 per kgMS.

“Given the weak New Zealand growing conditions and the failure of overseas producers to offset softer local production, we concur with the market view that the supply outlook is likely to remain tight beyond the end of the season,” Keall said.

He expects farmers could be paid $8.80 per kgMS next season, lagging behind the futures market expectation of $9.38 per kgMS.

ANZ’s agricultural economist Susan Kilsby on Tuesday raised her forecast for this season by 50 cents to $9.30 per kgMS, and for next season by 40 cents to $8.40 per kgMS.

However economists have warned that farmers are also facing higher costs, which is taking some shine off the forecast for a record payment.

As the country’s biggest processor, Fonterra’s payment sets the benchmark for its competitors. But higher milk prices can also squeeze profit margins for processors unless they can sell their products at higher prices as well.

Economists have noted that when dairy prices reach such high levels, they become unaffordable for some consumers.

NZX’s Davison said buyers from North Asia bought the vast majority of whole milk powder at the latest auction, and South East Asian buyers increased their share, however African and Middle Eastern buyers were far less active.

“Buyers from regions outside of Asia were not as active as in the last handful of auctions, potentially being outbid by aggressive Asian buyers in a tight market,” he said.

“North Asian buyers dominating GDT auctions again is a great sign, highlighting that there is no sign of their demand easing in the short term,” he said. “North Asian buyers are more than willing to chase prices higher, to secure the product they need.

State agriculture officials are expected to roll out an income replacement program soon.

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