Wednesday, February 21, 2024

Fonterra milk price puts profits under pressure

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‘Forecast prices are at or below Rabobank’s estimation of average costs of production’
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Fonterra’s opening milk price for the current season will make dairy farm profitability “a real challenge”, says Rabobank senior agricultural analyst Emma Higgins.

“While profitability depends on farming systems and management styles, forecast farmgate milk prices are at or below Rabobank’s estimation of average costs of production,” she said. 

In late May, Fonterra opened the new dairy season with a forecast farmgate milk price of $7.25 to $8.75 per kilogram of milksolids (kgMS), with a midpoint of $8.00 per kgMS. 

In March, DairyNZ said total farm working costs were expected to increase to around $9 per kgMS in the season that ended May 31.  

It did not immediately provide an updated number for the new season. 

The latest farm expenses price index from Statistics New Zealand shows that input costs continued to lift but at a slower pace. All inputs, excluding livestock, rose 0.5% in the March quarter compared to the December quarter, when they rose 3.0%.  

The pressure eased because of a 10% slide in fuel costs and a 4.2% decline in fertiliser costs. Interest rate costs, meanwhile, were up 7.9%.  

According to Higgins, Fonterra’s forecast is in line with what she expected.

She noted that global milk production is still growing but is “losing steam”.

It has been expanding modestly against weak comparable numbers since the third quarter of 2022.  Global dairy prices declined 0.9% in this week’s auction, to an average price of US$3,399 ($5,617) a tonne, with whole milk powder falling 3.0%. 

The NZX milk price forecast for the 2023-24 season dropped 25 cents following the auction, to $7.87/kgMS from $8.12/kgMS.

The slide was down to the weakness in whole milk powder prices, NZX dairy analyst Alexandria Winning said. 

“Signs of weakening dairy demand are spreading across some markets,” Higgins said. 

The cumulative effects of high food price inflation over the past 24 months, along with slowing economic activity in 2023 “have translated into slower dairy demand in developed and emerging markets”.

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