Fonterra forecasts price fall next year

Surging dairy prices are ripe for a fall early next year when European and American farmers resume production. Until then, Fonterra wants to iron out the increasingly volatile market.

Fonterra managing director of global trade Kelvin Wickham says the giant dairy co-operative is "happy to be realising gains in the market", but a pickup in supply when European and American farmers come on board will test the demand level in emerging markets and probably lead to a fall in dairy prices.

"Prices have moved above long-term sustainable levels. It's about that point where these prices are interesting for farmers to produce milk," Wickham says.

The price of Fonterra's milksolids jumped to a 13-month high on Fonterra's dairy auction website globalDairyTrade, and have surged some 88 per cent from their low in July. Dairy prices have climbed for seven straight months and are 44 per cent stronger than their low in February, according to ANZ's Commodity Price Index.

Fonterra boosted its forecast payout to farmers by 95 cents to $6.05 per kilogram of milksolids as a result of the resurgent global demand.

Still, "greater volatility and shorter cycles" in the dairy market made it harder for Fonterra to make its long-range forecasts, Wickham said.

The kiwi has jumped almost 50 per cent from its sub-US50c low in March, and the "weak US dollar has hindered" the recovery in dairy prices: "The first 25 per cent of gains go on wiping out the US dollar weakness."

What's needed is some way to mitigate the risk to farmers, and Wickham said he was encouraged by the New Zealand stock exchange's upcoming futures market for whole milk powder, as well as a proposed skim milk futures contract on the Chicago Mercantile Exchange.

The globalDairyTrade website played a big role in this, Wickham said, and it had already become a global reference price on whole milk powder for some suppliers "who stop selling a week before an event".

"We want to reduce that volatility and we may need to make more transactions [on the website]. One issue with globalDairyTrade is that there's only one auction a month."

Fonterra is in discussions with NZX about using its auction site as a reference price for the dairy futures market, and hopes to have a final decision before Christmas.

-BUSINESSWIRE