Dairy sale lifts farmers’ hopes of higher prices

Eyes now on Fonterra’s next update after strong global auction

Farmers’ hopes of higher milk prices were boosted yesterday, after another strong result at the latest Global Dairy Trade auction. Fonterra’s current forecast is pitched in a range of $6.30-$7.30 per kilogram of milksolids — with a $6.80 mid-point — but an adjustment is possible when the co-op releases its first-quarter earnings update tomorrow.

Dairy prices jumped by 4.3 per cent at yesterday morning’s auction, building on a 1.8 per cent gain at the previous auction last month.

Whole milk powder prices, which have the biggest bearing on Fonterra’s farmgate milk price, shot up by 5 per cent to US$3182 a tonne, well ahead of market expectations.

Skim milk powder prices — the second biggest influence — jumped by 3.6 per cent to US$2889/tonne.

Butter prices continued their rebound, rising 3.8 per cent to US$3986 a tonne, and making it five consecutive auction price gains.

Fonterra chief financial officer Marc Rivers told NZME’s The Country the GDT result was “bullish” and “very pleasing”.

“What it means is 145 million New Zealand dollars into the economy,” Rivers said.

Strong participation from China contributed to the 5 per cent leap in whole milk powder prices, and skim milk powder was trading at a premium to the European and US competition.

Westpac agri-economist Nathan Penny said there was a chance of an upgrade by Fonterra at tomorrow’s update.

“There is a fair chance that they will narrow the forecast range, if not lift the range outright,” Penny said.

Westpac has forecast a $7.00/kg milk price for the current season, and for 2021/22.

Penny said a $7.00/kg price would allow farmers to spend on farm maintenance, fertiliser, debt repayment and to bank a profit. “It’s a healthy, middle-ground milk price.”

Farmers will also take some confidence from whole milk powder futures prices, which are sitting comfortably above the important US$3000 threshold through to May 2022.

Wholemilk powder prices have been volatile throughout the year, mostly due to the Covid-19 pandemic, sinking to US$2677/tonne in May.

Prices are now getting back to normal, Penny said.

“Looking over a longer period, dairy prices are normalising.

“All up, these moves indicate that the recovery in global dairy demand is on increasingly solid ground,” Penny said.

Further price increases may be likely next year as Covid-19 vaccines are introduced and demand from restaurants picks up.

“Looking to 2021/22 the risks are a little more balanced given the recent surge in the New Zealand dollar and the fact that Fonterra will have only limited hedging in place at this stage,” said Penny.

Highly indebted dairy farmers will welcome stronger, more stable prices.

The Reserve Bank, in last month’s financial stability statement, said dairy farmers appear to be taking a more cautious approach to long-term capital investment in light of the global recession and the ongoing consequences of Covid-19.

“Banks have been working with over-extended dairy farmers and encouraging them to de-lever, by taking advantage of favourable commodity prices and historically low interest rates to repay loan principal and reduce their vulnerability to another dairy downturn,” the bank said.

However, some dairy farms remained financially vulnerable.

“This is particularly significant as some dairy farms remain highly indebted after experiencing two downturns in the last decade, and require a high milk price just to remain operational,” the bank said.

Between 2003 and 2019, dairy debt has grown by more than 267 per cent while overall loans to agriculture grew grew 192 per cent.

Debt has been the primary source of capital for dairy farms, with debt per kg of milksolids growing from $9.48 in 2003 to $21.99 in 2019.

Since 2017, dairy property prices have fallen by 16 per cent and dairy farm sale volumes in 2019 were 30 per cent lower than in 2016, thanks to a combination of factors including foreign buyers being blocked from the market and tighter credit.