Fonterra could pay its farmer suppliers a record milk price this season as lower milk volumes underpin high global prices, according to Westpac.
Westpac senior agri economist Nathan Penny on Wednesday raised his forecast for Fonterra’s farmgate milk price this season by 75 cents to $8.50 per kilogram of milk solids. That would surpass the co-operative’s previous record high of $8.40 per kgMS paid in the 2013/14 season.
Fonterra itself has said it expects to pay farmers between $7.25 per kgMS and $8.75 per kgMS, with a mid-point of $8 per kgMS. That’s ahead of its $7.54 per kgMS payment last season.
Penny said he upgraded his forecast after downgrading his expectation for milk production. He now expects New Zealand production to fall 1 per cent, compared to his previous expectation for a lift of 1 per cent.
“We now expect New Zealand production to fall this season, and along with soft production in other key dairy producers, we expect weak global supply to underpin global dairy prices at or around current high levels for at least the rest of the year,” Penny said.
He noted New Zealand production had started the season on the back foot. Winter and spring so far had been either wet or cold or both in many parts of the country and as a result, production for the first three months of the season is running 1.8 per cent behind the same time last season, he said.
The production softness was expected to continue in the short term, he said.
Most of the weakness to date was concentrated in August, which came in 4.2 per cent below August last year, and September looked to be similarly weak, he said.
“With the first four months of the year accounting for around 20 per cent of the season’s production, it will be very difficult for production to be made up later,” he said.
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, he said.
Still, Penny noted that $8.50 per kgMS was getting towards the upper limit of what Fonterra could pay. Higher milk prices, while beneficial for farmer suppliers, could squeeze margins if the co-operative wasn’t able to raise prices for the dairy products it sold.
He said the New Zealand dollar had been helpfully low recently, trading around US69.60c, and Westpac expected a rate of US70c for the season as a whole.
Prices were largely unchanged at the fortnightly Global Dairy Trade auction overnight, snapping three consecutive gains.
The average price for whole milk powder, which has the most impact on what farmers are paid, slipped 0.4 per cent to US$3749 (NZ$5381) a tonne. The average price is sitting 23 per cent higher than at the same time last year.
“There is still good demand for products, and buyers are willing to buy their needs at these price points, however it seems buyers are not much more willing than to secure the bare minimum of product,” said NZX dairy analyst Stuart Davison.
“Total volumes sold was on the lower end of the scale, meaning some offer volumes were left unrequired by buyers, taking some wind out of the strong demand sentiment for the time being.
“Whole milk powder is the perfect example of this, with a solid chunk of whole milk powder offer volumes left unwanted.”
Fonterra has been reducing the amount of whole milk powder it offers on the auction platform, saying it has “extremely strong” contract demand and expectations for flat milk supply this season will limit its ability to increase production.
The co-operative expects global demand for dairy to increase by about 2 per cent per annum out to 2030 and says it may divert some product away from the auction platform in the future, as it focuses on higher value products.
Davison noted that buyers from South East Asia were the dominant purchasers on every product except butter at the latest auction, unseating buyers from North Asia who typically dominated.
“It is relieving to see prices supported, without the biggest global player in charge,” he said.