Fonterra cuts NZ farmgate milk price as global dairy prices fall

Fonterra has cut its forecast price for its New Zealand suppliers by 12.5 per cent - $1 New Zealand a kilogram milk solids - after another dismal result in the Global Dairy Trade (GDT) auction.

NZ pundits who were previously upbeat about the global market prospects for 2023-24 have scrambled to revise their forecasts.

But those who were more cautious about the season's prospects say the threshold to lower their forecasts further has not yet been reached.

The market rout has been driven by the sluggish performance on the Chinese economy.

Slower economic growth around the world and the gradual rebuild in global dairy supplies are also factors.

The GDT price index was down 4.3 per cent on August 1, led by a massive 8.0pc fall in whole milk powder (WMP), NZ's key export commodity.

Fonterra responded quickly to the price plummet, slashing its forecast NZ farmgate milk price from a midpoint $NZ8/kg MS to a midpoint $NZ7/kg MS.

Fonterra CEO Miles Hurrell cited ongoing reduced import demand for WMP from China as the reason.

"When we announced our opening 2023/24 season forecast farmgate milk price in May, we noted it reflected an expectation that China's import demand for whole milk powder would lift over the medium-term," he said.

"Since then, overall GDT whole milk powder prices have fallen by 12pc, and China's share of whole milk powder volumes on GDT events has tracked below average levels.

"This reflects a current surplus of fresh milk in China, resulting in elevated levels of local production of whole milk powder, and reducing near-term whole milk powder import requirements."

But Mr Hurrell said the medium to long term outlook was positive with "milk production from key exporting regions flat compared to last year".

The forecast price is below the cost of production for some NZ farmers.

Westpac NZ senior agri economist Nathan Penny said the updated milk price forecast spelt a tough season ahead for Kiwi farmers, particularly given costs were still high.

"And indeed it does mean for a number of farmers that they're likely to be below their breakeven points," he said.

"But given the experience of previous cycles, and relatively strong balance sheets on-farm, we expect that most farmers will be relatively well placed to manage through this milk price cycle."

Westpac has move to slash its forecast milk price in line with Fonterra's - down from $NZ8.90/kg MS to $NZ7.80/kg MS.

Mr Penny pointed to NZ being unable to optimise its product mix as another factor for the dismal outlook there.

"That means we're stuck producing lower price whole milk powder, and we can't produce more relatively higher-priced cheese," he said.

ASB economist Nat Keall said ASB has been more cautious about the prospects for this season and was sticking by its forecast of $NZ7.25/kg MS.

"Most forecasters and the futures market have lowered their milk price expectations over recent weeks and months as demand has flagged, but given our below-consensus forecast, the threshold for us to lower our own forecast hasn't yet been reached," he said.

The NZ dollar was also underperforming, providing a bit of an offset.

Mr Keall pointed to the poor performance of WMP as the key factor.

WMP prices were by far the most important component in the GDT milk price calculation.

The latest fall takes WMP prices to their lowest level since early 2019 and represented their largest single auction fall since early 2017, Mr Keall said.

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