It’s seen Fonterra react by lifting its payout to a record $8.90-$9.50/kg MS, with a $9.20/kg MS midpoint.
Chief executive Miles Hurrell says the increase is the result of consistent demand for dairy at a time of constrained global milk supply.
“In general, demand globally remains strong, although we are seeing this vary across our geographic spread,” he says.
“Overall, global milk supply growth is forecast to track below average levels, with European milk production growth down on last year and US milk growth slowing due to high feed costs.
“It’s a similar supply picture in New Zealand. Earlier this month we reduced our forecast milk collections for 2021-22 from 1525 million kg MS to 1500m kg MS due to varied weather and challenging growing conditions,” he says.
Those conditions have seen a cold, wet spring give way to a hot, dry summer across many parts of the region, keeping a lid on milk production.
It all contributed to the big jump in values at the January 18 GDT, which saw prices lift 4.6%. WMP was the biggest mover, up 5.6% to $4082 a tonne.
NZX analyst Stu Davison says it was a staggering result, calling it a market reset.
“It seems the physical market is finally agreeing somewhat with the derivatives market, as we see both milk powder products fall roughly into step with the price range that the derivatives market has been setting for some time,” Davison says.
He says buyers turned up to the auction with a willingness to secure the product at any cost.
“It seems the market has also taken full stock of the tightness of milk supply globally and are now increasingly willing to pay the price to secure product,” he says.
He concluded by saying it “will also push the global dairy market into a renewed frenzy; what a great way to start the new year off”.
The high level of demand and the willingness of buyers to pay premiums for it saw ASB revise its forecast to $9.10/kg MS.
“With all contracts trading north of USD$4000/t at present and longer-dated contracts trading at a premium, prices should keep up the momentum over the near-term. We think that’ll be enough to push this season’s farm gate price north of the $9 mark,” economist Nat Keall wrote in its Weekly Commodities publication.
Westpac has maintained its $9/kg MS forecast, with senior agri-economist Nathan Penny saying the auction result backed up that price.
“The strong result cements our 2021-22 farm gate milk price forecast at $9/kg. In the short-term, the risks to our forecast are mostly on the upside. For example, ongoing dry weather could put additional dents in New Zealand production and push prices higher again. Meanwhile, Omicron-related supply chain issues could also lead prices higher,” Penny says.
Prices are now at their highest level since March 2014, with both cheddar and butter prices set record highs overnight, and Penny says the jump in prices also erases the ground lost in the second December auction.
Back inside the farm gate, farmers are facing similar challenges to last season. Labour shortages continue to be a problem. In November, the industry asked for an additional 1500 workers while a month later, the Government amended its class exemptions to allow more dairy assistants into the country.
Likewise, the contracting industry’s well-documented labour struggles with finding staff could affect what has been an outstanding season for growing maize.
There is also no sign of the rise in input prices easing. Globally, urea prices have almost quadrupled since 2020, from an average US$229 to $828 last year. The latest agrichemical to see a lift is glyphosate, up 100% in some countries.
Exactly how much this will erode farmers’ margins won’t be known until autumn when the season starts to wind down.
So how long will the high prices last? It looks like it’s here to stay for now. Prices for the new season should start high but could lose steam as the season commences.
Penny says prices are likely to eventually ease off as supply inevitably starts to balance out demand once again.
In the meantime, this new record milk price will be the bright spot in a challenging season.