Today’s Global Dairy Trade results show an upturn in prices for New Zealand products that is considerably greater than evidenced from the headline increase of 1.8% in the GDT Index. The reason is that the index uses product weightings, based on global trade in dairy, that are very different to the actual volume weightings of Fonterra’s products. The key measure for New Zealand dairy farmers is that the price of whole milk powder (WMP) rose 9.2% to $US3421. This is the highest price since February.
For the first time this season, the auction prices are sufficient to support the current Fonterra predicted milk payout of $5.25. There is still ground to be made up from the low prices from early in the season, and the average-to-date price is still insufficient to support a whole-of-season price of $5. But the overall message is that prices are moving in the right direction.
The negatives in the auction relate to anhydrous milk fat (AMF) and cheese. The price of cheese dropped 9.9%. However, cheese only made up 6% of the Fonterra product offering for this latest auction (and for the whole season will make up only 5% of Fonterra’s auction offerings) whereas it makes up 20% of the global index. Also, cheese is not included in the Fonterra milk price calculations.Therefore the lower cheese prices will impact via the Fonterra profit, and therefore the dividend, rather than through the milk price.
With TAF (Trading Amongst Farmers) about to start, the distinction between milk price and dividend will become increasingly important. Under this scheme (somewhat mis-named) dividends will also flow to non-farmer investors.
There is still a long way to go before we know what either the milk price or the dividend will be for this season. History tells us that pre-Christmas estimates are always unreliable. And in the past, significant changes in the estimated payout have occurred right up to May. But at least for the milk price component, the signs are becoming increasingly positive.
17 October 2012