The GDT-TWI price index fell 5.3% compared to the last sale two weeks ago. The average winning price fell to US$4443 a tonne from US$4549 a tonne. Whole milk powder, the biggest product by volume, fell 7.1% to US$4643 a tonne, the lowest since the March 5 auction.
The total volume of dairy products sold at the latest auction rose to 24,252 tonnes, the highest since the February 19 auction. The volume shrank to a drought-affected 13,912 tonnes in the early April sale.
Dairy commentators aren’t surprised at the fall. Westpac economist Nathan Penny says the fall is in line with expectations. In particular, the increasing volumes on offer, most of which now relate to the new season, drove the price fall, and a strong production rebound this season will cause prices to ease further, he predicts.
The bank is forecasting a milk payout of $6.50/kgMS for this season, up 30c from its last forecast. However, it is 50c short of Fonterra’s forecast released last month.
Penny says Fonterra has been the preferred supplier in the fast growing Chinese milk powder market. “We think, as a consequence, the impact of drought on New Zealand production has been the primary factor behind the GlobalDairyTrade price spike. This story is now largely playing out in line with the dynamics we described.
“Fonterra’s forecast implies that world prices, after coming off their highs, stay at an elevated level for [most] of the season. Fonterra cites weak world production in other producers such as the EU as providing ongoing support for prices.
“We agree with Fonterra’s view on the outlook for competitors’ production levels this season, however we expect supply here to rebound strongly. We have pencilled in a 5% rebound in production volumes at this stage, and there is room for more.”
In the same way as drought here pushed prices skyward this season, Penny says increasing local production next season will dampen prices by more than Fonterra is anticipating at this stage.
Fonterra has announced a farmgate milk price of $7/kgMS for the 2013-14 season – $1.20 more than last season. Fonterra farmers will also get an advance of $5/kgMS for their milk.
Fonterra normally pays farmers in advance 65% of the opening forecast milk price.
However, Fonterra chairman John Wilson says strong global dairy prices and balance sheet allow it to pay 71% of the forecast price in advance.
Dairy farmers, particularly those in the North Island, were hit hard in the drought. DairyNZ estimates the average North Island farmer has lost $100,000 in farm income and spent an extra $57,000 on supplementary feed to keep cows in milk.
Wilson says Fonterra is aware of cashflow problems facing many farmers and the higher advance will take some pressure off their balance sheets. “We know last season’s milk payout of $5.80/kgMS was one of the lowest in recent years,” he told Dairy News.
