Milk powder price slides further 3% to record low in Fonterra auction (Update 1)
2nd Jul 09, 7:39am
The average wholesale milk powder price settled in the overnight auction for July on Fonterra's Global Dairy Trade online trading platform was US$1,829 a tonne, which was down 3% from June and below the record low of US$1,851/tonne set in February when prices crashed. (Adds Fonterra comments from news release later in the morning) US Department of Agriculture figures show wholesale milk powder prices on international markets have not been this low since at least 2004. Fonterra forecast a NZ$4.55/kg payout for the current 2009/10 year in May when the wholesale milk powder price was over US$2,100 a tonne and the currency was forecast to be around 59 USc. Since then the wholesale price has fallen a further 15% and the currency has strengthened 8% to 64 USc, suggesting an eventual payout closer to or even below NZ$4/kg if prices stay this low and the currency stays strong for the rest of the season. Given the size of the dairy sector's contribution to the economy, this has the potential to lengthen and deepen the recession, drive dairy land prices lower and depress regional areas such as Waikato, Taranaki, South Canterbury and Southland that depend on the dairy payout for a large chunk of economic activity. Also, this will further pressure newly converted large dairy farms struggling under heavy debts. Moody's has warned that banks in New Zealand face challenges because of the strong lending to new dairy farms in recent years. Fonterra said there had been good customer interest in the auction, but there was continued caution about pricing.
"We saw increased customer demand, but they remain wary about paying too much in an uncertain environment. Consequently they are taking a conservative approach with their purchasing as they try to second guess when the inevitable increase in demand, and consequently prices, will occur," said Kelvin Wickham, Managing Director of Fonterra GlobalTrade. "Today's result reflects that the market is still in a rebalancing phase. On the one hand milk supply globally is declining sharply but on the other hand recessionary conditions mean consumers have reduced their purchases of dairy products. Right now our customers are attempting to predict exactly when decreasing supply or increasing consumer demand will result in an inevitable firming of prices."