Friday, 01 January 2021 09:55

Milk price drop puzzling

Written by  Sudesh Kissun
Fonterra has announced a slight downgrade to its farmgate milk price for the season just ended. Fonterra has announced a slight downgrade to its farmgate milk price for the season just ended.

Fonterra's decision to downgrade its 2020-21 milk price midpoint by 5c has surprised farmers and markets.

Wespac senior agri economist Nathan Penny says he is puzzled by the "anticlimactic" milk price update.

The co-op last week narrowed its 2020-21 farmgate milk price range: from $7.30-$7.90/kgMS to $7.45-$7.65/kgMS, with a midpoint of $7.55/kgMS.

Penny notes that the 'spot milk price' since Fonterra's last update in March has been around $9.00/kgMS and sometimes higher.

"We must admit we are puzzled by the downgrade," he says.

Federated Farmers dairy chairman Wayne Langford told Rural News that farmers are surprised.

However, he says that Fonterra chief executive Miles Hurrell and his team "have done a good job in reasoning it clearly to farmers."

Hurrell says since March dairy prices have "settled, somewhat".

"That is why we have revised our midpoint down 5 cents," he says.

He noted that in an "extraordinary" March Global Dairy Trade (GDT) event, prices jumped 15% and contributed to the increase in Fonterra's forecast milk price.

The average price for whole milk powder was over US$4,350/metric tonne, he noted. However, in the last three GDT events, the average price has reduced to close to US$4,100/MT.

Butter prices have gone from almost US$6,000/MT to below US$5,000/MT for the first time since January.

Despite the 5c drop, Hurrell says 2020-21 would be the second year in a row with the second year in a row with the forecast milk price above $7/kgMS. ASB economist Nat Keall says the downgrade is "a wee bit of a surprise" given most forecasters lifted their own forecasts considerably higher since Fonterra's last update.

ASB is retaining its $7.60/kgMS forecast for the 2020-21 season.

Penny has a couple of possible explanations for the downgrade. One is that the impact of the rising New Zealand dollar on the milk price has been larger than expected.

The other explanation is that a larger proportion of the milk sold at recent auctions, at very high prices, has been earmarked for next season than analysts had estimated.

"This latter explanation could also help explain why Fonterra has been so bold for the new season," Penny says.

"At this stage, we can only speculate. We still learn more on this front when the milk price statement is released later in the year."

Penny says that on the basis of high spot milk price, their model had estimated a price in the vicinity of $7.90/kgMS.

"This is significantly lower than our forecast - at this late stage of the season, we take this one on the chin and adopt Fonterra's forecast midpoint of $7.55/kgMS."

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