Fonterra Co-operative Group has cut its forecast farmgate milk price for the soon-to-end season by effectively 30c - although the final outcome will still be a record price.
The co-op is now forecasting a price range of $9.10 to $9.50 per kilogram of milk solids, down from from $9.30 - $9.90 per kgMS.
This reduces the "midpoint" of the range, which farmers are paid off, from $9.60 per kgMS to $9.30 per kgMS.
The move by Fonterra followed very sharp falls in prices at the most recent GlobalDairyTrade auction.
Even at the lower price the payout for the season, which ends at the end of this month, will still easily beat the previous record payout of $8.40 in 2013-14. But a drop of this magnitude so late in the season is nevertheless something of an unpleasant surprise.
Fonterra chief executive Miles Hurrell said the forecast drop was due to a number of recent events that have resulted in short-term impacts on global demand for dairy products – in particular, the lockdowns in China due to Covid-19, the economic crisis in Sri Lanka and the Russia-Ukraine conflict.
"This will be disappointing for our farmers, but the change in global dairy prices is coming off record high levels. At a midpoint of $9.30 per kgMS, this would continue to be the highest forecast Farmgate Milk Price in the Co-op’s history and would see us contribute almost $14 billion into New Zealand’s economy through milk price payments, which supports the wellbeing of our local communities."
Hurrell said while the long-term outlook for dairy remains positive, and Fonterra expected global demand and supply to be more balanced over the rest of the year, the short-term impacts described above had flown through into pricing on the Global Dairy Trade (GDT) platform. Average prices for whole milk powder (WMP), a key driver of the milk price, had for example, decreased by 18% over the past four GDT events.
"As an exporter to 140 countries we deal with these kinds of global events all the time, but right now we’re seeing the impact of multiple events. Coupled with inflationary pressures, it’s not surprising to see buyers being cautious."
Looking out to the rest of the year, global milk production was expected to remain constrained as high feed, fertiliser and energy costs continue to impact production in the Northern Hemisphere, and Fonterra expects demand to recover as the short-term impacts begin to resolve.
"While there is still a high level of uncertainty in global markets, the majority of our milk has been contracted for the season. It’s for this reason that we’ve made the decision to narrow our forecast range to +/- 20 cents.
"As always, there are a number of risks we are continuing to keep a close eye on, including potential impacts on demand from inflationary pressures and rising interest rates, increased volatility as a result of high dairy prices, and further disruptions from Covid-19 and geopolitical events."