Thursday, August 18, 2022

Can the milk price reach $10?

A third consecutive 4% rise in Global Dairy Trade (GDT) prices has market analysts, dairy companies and futures traders sharpening their pencils to see if a farm gate milk price of $10/kg milksolids could be delivered.

Fonterra chief executive Miles Hurrell says the sale of two-thirds of the GDT platform will bring more participants and transactions, stimulating further growth of risk management contracts available on financial trading platforms.

A third consecutive 4% rise in Global Dairy Trade (GDT) prices has market analysts, dairy companies and futures traders sharpening their pencils to see if a farm gate milk price of $10/kg milksolids could be delivered.

Whole milk prices rose 4.2% in the latest GDT auction, skim milk powder was up 6% and butter was up 5.1%.

The GDT price index has risen 14% since the beginning of 2022 and is up 19% since the start of the current season.

With three more months to run and no end in sight to strong global dairy demand, forecasters are talking about the prospect of a $10 farm gate milk price.

“Upside risks are growing to our already record high $9.50 forecast,” Westpac senior agri economist Nathan Penny said.

The persistence of the demand and the lower value of the New Zealand dollar led Penny to add $1 to his 2022-23 season forecast, now $8.50.

Dairy farmers can also lock in some of their forward production by selling milk price futures contracts for both September 2022 and September 2023 deliveries at $9.55.

The buyers of those contracts, mainly dairy processors and product makers, must be convinced that high prices are here to stay and indeed there are more price increases yet to come.

ASB economist Nat Keall said a record-high farm gate milk price is a near certainty and the question now is how high it will go?

The bank has a current forecast of $9.25, with some expectation of the current high commodity prices factored in, but there is now upside risk.

ASB also has a 2022-23 season forecast at $8.80 and while the margin for error is large, the futures market is a “little bit overexcited” expecting $9.50.

The NZX milk price estimate rose 11c to $9.45, with an assumption of 5% increase in commodity prices built in.

Meanwhile, Fonterra has announced the sale of two-thirds ownership of the GDT platform.

The NZ Exchange (NZX) and the European Energy Exchange (EEX) are to each take one-third ownership alongside Fonterra, which launched the GDT platform back in 2008.

Fonterra chief executive Miles Hurrell said the partnership would further enhance the standing of GDT as an independent, neutral, and transparent price discovery platform.

It would also give it a presence in prominent international dairy producing regions and create future growth opportunities.

“This is good news for our farmer owners, unit holders, and all dairy industry participants and is expected to lead to greater volumes being traded on GDT,” Hurrell said.

“It will bring more participants and transactions, stimulating further growth of risk management contracts available on financial trading platforms.”

Fonterra said the sale of two-thirds of GDT would bring in $25 to $30 million, subject to settlement adjustments and confirmation on completion of the transaction.

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