Prices for whole milk powder rose 4.6% at the latest global auction, but are 25% lower than this time last year.
The price of whole milk powder, which has the biggest impact on farm milk prices, rose at a second global auction, a welcome relief for many dairy farmers who will struggle to reach the break-even point this season.
The average price of whole milk powder rose 4.6% to US$2,799 (NZ$4,620) per tonne at the Global Dairy Trade auction, following a 5.3% gain at the fortnightly auction previous ones.
The overall GDT price index increased by 4.6%, with anhydrous milk fat increasing by 5.3%, butter by 3.8% and skimmed milk powder by 5.4%. Cheddar slipped 1.7%.
Global dairy prices have fallen sharply this season due to lackluster demand from China, the world’s largest importer of dairy products and Fonterra’s biggest market for whole milk powder. Prices for whole milk powder fell 18% in August and are 25% lower than the same time last year.
“These latest results are welcome,” Westpac senior agricultural economist Nathan Penny said. “That’s two decent auctions in a row, so we’ll definitely take it.”
Still, Penny said he remains cautious as farmers head into their peak milk production period.
“It’s very early to know whether prices have turned a corner or not,” he said. “I’m still pretty cautious about the outlook.”
Penny said he would like to see further price increases in October and perhaps into November to have confidence that dairy markets have weathered the downturn and are out of the woods.
The two main factors influencing prices are spring milk production and Chinese demand, he explained.
Fonterra is forecasting a 1.1% drop in its New Zealand milk collection this season, to 1,465 million kilograms of milk solids. The season started in June and production generally increases rapidly and peaks in late October.
Wet and cold weather hurt last season’s spring production, although a late season improvement saw Fonterra’s overall milk collection rise 0.2%.
“If weather conditions are normal, it is possible to get better production this spring,” Penny said.
He noted, however, that lower milk prices this season put pressure on farmers and they may forego purchasing additional feed, which would limit production.
“It’s a little hard to see how this is going to happen,” he said. “It could go one way or the other in the spring and throughout the season. It’s still very early in the season.
As for Chinese demand, Penny said there had been no significant changes.
“We are still waiting for the Chinese economy to improve and for households to regain their motivation for prices to rise,” he said.
Penny said recent auction gains in the global dairy market may have been driven by low prices generating some demand.
“It’s a good thing, but it doesn’t necessarily mean things are going to take off from here,” he said. “What we need to see for that to happen is that demand actually improves, rather than being driven by low prices. »
Fonterra takes into account the fat and protein levels in milk when it buys it from farmers.
Penny expects Fonterra to pay farmers $6.75 per kgMS for this season.
This matches the midpoint of Fonterra’s forecast, which spans a range of $6 to $7.50 per kgMS.
Dairy NZ has calculated an average break-even milk price of $7.51 per kgMS for this season, meaning many dairy farms will not be profitable.
Fonterra is expected to finalize the farmgate milk price payment for last season when it releases its annual results on Thursday. The cooperative anticipates a payment of $8.10 to $8.30 per kgMS, with a midpoint of $8.20 per kgMS.