ANZ economists believe Fonterra will have to trim its $4.60 milk price pick as the hoped-for recovery in global dairy prices remains elusive

By David Hargreaves

ANZ economists say Fonterra isn't going to be able to make its forecast milk price of $4.60 per kilogram of milk solids for the current season and will have to pare back that forecast when it is next reviewed.

The economists have for some time been predicting a final price of in the region of $4.25-$4.50, but say that at the moment it's looking like being at the "bottom end" of that range.

Fonterra re-affirmed its $4.60 price pick as recently as December 10, but has made clear that the forecast is dependent on an assumption that there will be reductions in production globally and that this will help to boost international prices in the New Year. See here for the full dairy payout history.

Another GlobalDairyTrade auction is set to be held in the early hours of Wednesday morning, New Zealand time. The ANZ economists in their weekly Market Focus publication say they're expecting a "flat" result in the auction.

"NZX futures are pointing to a 2-3% lift, but with the last two GDT auctions undershooting NZX futures market expectations, we’re conservative in our expectations of the extent of any improvement in prices over the first part of 2016."

The economists said that a flat forward price curve for milk powders at the last two auctions and anecdotal market feedback suggested buyers were relatively comfortable with their current inventory levels and forward-contracted supplies at present. Offshore, seasonal factors such as increasing European milk supply and reduced China import demand were also likely to cap improvements in prices through the first half of 2016.

"...All up, a reduction in the 2015/16 milk price forecast is expected at Fonterra’s next update. Open Country Dairy (the country’s second-largest dairy processor) last week reduced its season average price to $4.00-$4.30/kg MS (-$0.30/kg MS), highlighting the direction of risk.

"We are maintaining our range of $4.25-$4.50/kg MS, but would be toward the bottom end at present. Year-to-date, we have the milk price around the low-$4/kg MS mark."

The economists did say however, that there was some evidence emerging of supply restrictions beginning to come into play offshore.

"There are murmurings out of China of significant raw milk pricing reductions and renegotiations (falls) of farmer supply contracts by domestic processors. In Europe, the Dutch cooperative FrieslandCampina has been so overwhelmed by the increase in milk from farmers it has run into capacity constraints, and has offered a bonus to suppliers to stay below a certain volume of milk, capping supply for now. All up, supply reductions over time will help trigger improvements in prices, but that feels more likely a late 2016 (or even 2017) story at the moment, with a sustained price improvement requiring a lift in demand growth (especially from China)."

In its January Global Dairy Update Fonterra says that its milk collection across New Zealand in December was 3% lower than the same month last year. For the season to 31 December (seven months) it reached 932 million kgMS, 4% behind the same period last season. "Lower milk collection for the 2015/16 season is largely a result of the low milk price environment, where farmers have reduced stocking rates and supplementary feeding in order to reduce costs," Fonterra says.

The below graph shows the trend of Fonterra's milk collection in the current season compared with the past two years.

Fonterra's currently expecting that for the complete current season total production will be down by about 6%.