Dairy Price Update

The latest Global Dairy Trade auction (1 September) has shown a remarkable increase of 17% since the August auction, to reach an average price of $3562. When converted to NZ dollars, the increase is close to 20%. This is remarkable, and is being widely reported in the media as proof that Fonterra was correct in its August pronouncements that dairy prices are likely to trend upwards in coming months. It was on that basis that Fonterra decided to keep its estimate of NZ$6.60 per kg milksolids as the milk price payout.

The upturn in the September auction appears to have led to an immediate strengthening of the NZ dollar against both the Australian and American dollars, in each case by about 0.5 cents.

If these current prices were to be maintained, and with an exchange rate of about 71 cents American to the Kiwi dollar, then a Fonterra milk price for this 2010/11 year of somewhere around $6.50 per kg milksolids would be achievable. In contrast, if last month’s prices (US$3080 per tonne) were sustained for the whole season, with exchange rates as they were at that time (73c), then the payout would only be about $5.25.

Of course neither of these prices is likely to be the final price. Although Fonterra has much of its 2010/2011 production ‘committed’, this is not the same as having it ‘contracted’. It means that Fonterra knows the likely buyers, but price has still to be determined. It is therefore far too early in the season for there to be any confidence as to the final price.

Commentators seem to have totally missed a key feature of the 1 September auction. This key feature is that Fonterra only put up 29,000 tonnes compared to 59,000 tonnes last month. This is because they are about to move to an auction every two weeks.

At the August auction, there were 127 bidders of whom 111 managed to acquire product. It took only seven rounds of bidding to reach an equilibrium price where supply and demand were in balance. In contrast, for the September auction there were 151 bidding parties, of whom only 75 managed to obtain product after ten rounds of bidding. So there has to be a suspicion that the price was lifted by a short term shortage of supply. Given the next auction is mid September, we won’t have long to wait for an answer.

Several weeks ago it looked like the export ban on Russian grain had shifted the global cereal markets in a big way, particularly for wheat. Wheat prices almost doubled in just a few weeks. It was predicted that this in turn would cause some Northern Hemisphere farmers to feed less grain to their cows. Now the effect is looking less severe, with wheat futures slipping back from a stratospheric US$8.60 to about US$7 per bushel. In Kiwi currency this US$7 per bushel is about $370 per tonne. However, corn is still drifting higher at about $4.50 per bushel (about $NZ260 per tonne), This is about back to where it was at the start of 2010.

This year it has certainly been a funny season across the globe, with Russia too dry, Canada too wet, yet much of the American Mid-West having a fantastic season. Parts of South America have been getting record cold, while here in NZ it has been warm but oh so wet.

In regard to Kiwi milk prices, the big message remains the same. There is lots of uncertainty out there and it won’t be until the end of November that the final Fonterra payout can be predicted with any level of confidence.


About Keith Woodford

Keith Woodford is an independent consultant, based in New Zealand, who works internationally on agri-food systems and rural development projects. He holds honorary positions as Professor of Agri-Food Systems at Lincoln University, New Zealand, and as Senior Research Fellow at the Contemporary China Research Centre at Victoria University, Wellington.
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