The latest prices from the Global Dairy Trade auction demonstrate once again the folly of getting too confident too early in the season. Back in late May, when Fonterra announced its opening forecast of $6.90-$7.10 for milk price plus distributable profit, they added the rider that it was possible that ‘payout could be well over $8’. Since then, global dairy trade auction prices have dropped 24% in US dollars, and close to 30% in NZ dollars. So what is the current outlook for payout this year?
Fonterra did not adjust its forecast following the July meeting of the Board, which followed the 14% drop in auction prices earlier that month. But now, with the latest drop of a further 8.3%, the $7 is looking very optimistic.
I have said before that it will be November before we get a good estimate, and that still applies. All sorts of things can happen as the season progresses. Also, only Fonterra knows the long term price guarantees it has in place, and the details of its hedging policy, both of which can have a big impact. But we also know, from the experience of 2008/9, that Fonterra can get its early season forecasts badly wrong.
There is a general feeling in international markets that supply is going to be plentiful in the next few months. American production is up 2% in June and this has the same overall effect on world production as a 10% increase in New Zealand production. The biggest uncertainty on the demand side is the strength of Chinese demand. It is these Chinese purchases that have been so important in buttressing our NZ prices over the last year or so.
Two months ago I was saying that it was better to budget on $6 and end up getting $8, than to budget on $8 and end up with only $6. Now I am saying that the possibility of payout slipping below $6 cannot be ignored. The next three months will be crucial.