'Upside potential' for milk payout

She says there’s “upside potential” for the forecast farmgate milk price if prices the recent price rises on Global Dairy Trade (GDT) auctions continue this year.

The latest Global Dairy Trade (GDT) auction, the first for 2021, recorded solid gains in whole milk powder (WMP) and fat product prices, building on gains in the two December auctions.

WMP prices, used by Fonterra to set its payout, sit at a 12-month high of US$3,306/metric tonne.

Skim milk powder prices rose 4.1% to over US$3,000/MT.

Higgins says while an overall lift in commodity prices for the last GDT event wasn’t surprising, the magnitude of the rise was unexpected – particularly for skim milk powder (SMP).

“We are happy with our current forecast milk price of $7/kgMS for now, but there’s certainly upside potential for the forecast farmgate milk price should these prices continue into the New Year,” she told Dairy News.

Last month, Fonterra narrowed its forecast payout range to $6.70-$7.30/kgMS. ASB lifted its forecast to $7/kgMS.

ASB senior economist Chris Tennent-Brown notes that the latest GDT price rise built on gains of December that led to the bank lifting its forecast price.

He says WMP prices have now edged comfortably ahead of where they were a year ago.

“The contract curve remains flat and stable, so price gains aren’t being driven by short-term supply fears.

“The latest GDT result provides a buffer to our $7 forecast, and more of the same over the coming events could well see Fonterra narrow its forecast range.”

Gains on GDT auctions over the past two months are being mostly attributed to strong demand from China.

While most countries are still dealing with waves of Covid-19, China’s economy is bouncing back after weathering the Covid storm.

Fonterra said last month that China was continuing to recover well from Covid-19 and this was reflected in recent GDT auctions.

The co-op noted a strong demand from Chinese buyers for WMP.

“The impact of Covid-19 continues to play out globally, and we continue to have a watchful eye on the increasing Northern Hemisphere milk production and New Zealand dollar,” said Fonterra chief executive Miles Hurrell.

“However, we have contracted a good proportion of our sales book for this time of the season, which has given us the confidence to narrow and lift the bottom end of the forecast farmgate milk price range.”

New Zealand milk production also impacts GDT prices; a drop in production can spark supply fears.

Data released in late December by the Dairy Companies Association of New Zealand (DCANZ) showed NZ November milk production was down 2.5% on a tonnage basis and down 2.7% on milksolids basis on November 2019.