A slide in prices at the latest Fonterra GDT auction may be a wake-up call to dairy farmers that they are operating in a global market hard hit by inflation.
They may be operating in a higher-cost environment but consumers in their markets are suffering, too, from soaring costs.
The average price at the fortnightly sale dropped 5% to $US4166 a tonne, after falling 4.1% in the previous auction. That is the lowest price since early October last year and 18% below the record set in March.
Prices have fallen in eight of the past nine auctions.
Anhydrous milkfat prices fell 2.1%, butter prices fell 2.1%, and cheddar prices dropped 2%.
The current midpoint of Fonterra’s forecast milk payout for the current dairy season is $9.50kg/MS.
NZX Dairy insights manager Stuart Davidson said extra volumes on the GDT platform and expectations of market pressures on end consumers had created a market that expected prices to fall significantly lower.
Notably, from the demand side, key market participants were still at the auction, but with very different buying habits to those of six months ago. North Asian buyers managed to buy the largest volume of dairy overall, but they bought significantly less whole milk powder than at the previous auction, while South East Asian and European buyers significantly increased their purchase volumes.
Other commentators noted that expectations of market pressures on end consumers have created a market that expected – almost needed – prices to fall lower.
They said buyers from South East Asia had saved the day buying as much as Northern Asian bidders, especially for whole milk powder.
Among their observations:
“This downwards price direction is also unsurprising considering wider macroeconomic factors; food service will be expecting some impacts and affordability of butter for households will also be questioned currently. “
Most commentators believe the broader market is getting back into balance amid the general uncertainty, even though it might be unpalatable for local dairy producers.
If the price correction serves as a wake-up call to the industry to strive even more vigorously for the highest efficiency, as the top farmers do, it may be no bad thing.
There is a general expectation that prices will start to find support around the levels they reached at this auction and may track higher again into peak NZ milk on the back of more agreeable prices for the wider market.
Farmers will recall that the market followed a similar dynamic this time last year, with the market uneasy before August, and then settled.
Point of Order is a blog focused on politics and the economy run by veteran newspaper reporters Bob Edlin and Ian Templeton