Fonterra has surprised analysts by announcing the highest forecast Farmgate Milk Price midpoint on record. For season 2021-2022 the dairy giant announced a midpoint price of NZ $8 (US $5,81) per kg milk solids.
"Fonterra surprised us with its bold opening salvo," senior agri economist Nathan Penny from Westpac says. "Traditionally Fonterra opens conservatively in order to reduce the risk of overpaying farmers early in the season. It is also the same as our forecast. Fonterra stated that global dairy supply is very constrained and that is the same reasoning underpinning our milk price forecast as well."
Fonterra also announced an opening forecast Farmgate Milk Price range for the 2021-2022 season of US $5.26 to US $6.35 per kg milk solids. The dairy giant lowered its 2020-2021 forecast Farmgate Milk Price range with 3.63 US cents, with a midpoint of US $5.48 per kg MS. According to CEO Miles Hurrell this is because prices have settled somewhat since March.
This lowering of the forecast for this season puzzles analyst Penny. "We were expecting a healthy upgrade to Fonterra's forecast. But in the end we haven't got it." Penny still thinks the outlook for dairy over the next year is very healthy.
Global demand for dairy, especially New Zealand dairy, is continuing to grow."
Global demand growing
CEO Miles Hurrell of Fonterra says that the improving global economic environment and strong demand for dairy, relative to supply, are sitting behind Fonterra's US $5.81 midpoint of its 2021-2022 forecast Farmgate Milk Price range.
"Global demand for dairy, especially New Zealand dairy, is continuing to grow," Hurrell says. "China is leading the charge as its economy continues to recover strongly. Prompted by Covid-19, people are seeking the health benefits of milk and customers are wanting to secure their supply of New Zealand dairy products and ingredients."
According to Hurrell, growth in global milk supply seems muted and the global supply of whole milk powder is looking constrained. "Based on these supply and demand dynamics, along with where the NZ dollar is sitting relative to the US dollar, we're expecting whole milk prices to remain at current levels for the near future," he says.
The Fonterra CEO sees a number of risks, looking out over the next 18 months. "Some of the major risks include: Covid-19, which is far from over; the impacts of governments winding back their economic stimulus packages; foreign exchange volatility; changes in the supply and demand patterns that can enter dairy markets when prices are high; and as always, potential impacts of any geopolitical issues around the world."
Coles restructuring milk supply chain
Prices in the final Global Dairy Trade auction for the season have remained steady, with a 0.2% drop from the previous auction. Whole milk powder was also down 0.2% to an average US $4123 a tonne, while skim milk powder went up 0.7% to US $3447 a tonne.
In Australia supermarket chain Coles is restructuring its milk supply chain to purchase milk directly from Tasmanian dairy farms for Coles Brand fresh white milk. Coles says this will provide farmers with greater confidence over their future income.
Under the new sourcing model, Coles will offer Tasmanian dairy farmers transparent farmgate contracts of up to three years, replacing the current model under which Coles Brand fresh white milk sold in Tasmania is sourced through processors, who set the price farmers receive.
Coles launched its direct sourcing model in Victoria and Southern and Central New South Wales in 2019, contracting directly with local farmers to supply milk for Coles Brand fresh white milk in those markets and offering a competitive farmgate milk price.
The model was extended to South Australia and Western Australia in 2020, with all Coles Brand fresh white milk in those markets now coming from directly-contracted farmers within their respective states. Under the direct sourcing model, Coles offers a farmgate price directly to farmers, and pays dairy processors to process and bottle the milk.