While the price surge is expected to fuel speculation Fonterra will up its farmgate payout, the recent gains still have a long way to go just to reach Fonterra’s forecast of a $3.85 per kg of milk solids – itself is well below break-even for the majority of Fonterra suppliers.
Analysts’ reactions to the gains were mixed yesterday. BNZ upgraded its payout forecast from $3.80 to $5 but Westpac held its forecast at $4.30.
Some of the price rise can be attributed to fewer products being presented for auction and Fonterra having recently restated its expectations milk production will decline 2%-3% this season.
There is also rising concern from the prospect of further negative effects to milk production from an El Nino weather pattern, but that could prompt buyers into futures contracts, pushing prices higher.
Westpac senior economist Michael Gordon said the 16.5% overall dairy price rise was an even larger increase than had been anticipated by the NZX futures contracts. Skim milk powder rose 17%.
»Milk production is likely to slow of its own accord given the low returns expected for this season.
»But it’s the weather – the as-yet unknowable impact of an El Nino pattern this summer – that will be the ultimate arbiter,» Mr Gordon said of Westpac’s decision to maintain its farmgate milk price forecast of $4.30 kg for this season.
BNZ rural economist Doug Steel was more upbeat, saying the bank had retained its $3.80 milk price forecast »amid the extreme volatility» during the past several auctions, but noted risks had been turning.
»The risk profile turned neutral following the first strong GDT price lift in mid-August. Another big price gain at the early-September auction attached upside risk to our forecast,» he said yesterday.
He had expected international dairy prices to start recovering this year, but they had lifted earlier and faster than anticipated, so »we lift our [forecast] view to $5 from $3.80».
He said some recent auction price improvement seemed related to lower near-term offer volumes from Fonterra, as it responded to market conditions, including price signals across selling channels and products, customer demand, and milk collection expectations.
AgriHQ analyst Susan Kilsby said the lower volumes of product offered at auction, along with expectations New Zealand milk production would fall this season, were the factors pushing prices higher.
»Buyers are aware that a drier than normal summer will slow milk output in New Zealand, therefore we are starting to see a little more urgency from buyers wishing to secure purchases,» Ms Kilsby said in research for brokers Craigs Investment Partners statement.
Source: ODT
