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The chances of an upgrade in Fonterra's farmgate milk price forecast became more remote this morning after world dairy prices fell by by 7.4% at the GlobalDairyTrade auction. The decline was sharper than futures market pricing had suggested.
Wholemilk powder prices, the key product for determining Fonterra's farmgate milk price, fell by 8.0% to US$2453 a tonne - well short of the $US3000 that farmers would be comfortable with.
Another key product, skim milk powder, also fell by 8.0% to US$2018 a tonne.
Price falls were across the board, with butter milk powder dropping by 9.4% to US$1844 a tonne and rennet casein falling by 11.2% to US$5469 a tonne.
The market has chopped and changed in recent months, with prices firming dramatically over August and September, only to fall by 3.1% at the last sale October 21.
Jon Spainhour, broker and partner Chicago-based dairy specialist, Rice Dairy, said buyers had "stepped back" from the market after its sharp run higher over. He expected prices to fall again at the next auction later this month.
"But we don't see the market annihilating itself," he said.
Fonterra has a $4.60 per kilogram of milksolids farmgate milk price forecast on its books - well short of the $5.30 a kg required for most farmers to reach break even. The co-operative is expected to revise its forecast later this month.
Regular grade whole milk powder offered by Fonterra, for January 2016 delivery, failed to move from its starting price which was 15% lower than the previous auction price.
The NZX dairy futures market shows a flat outlook for dairy commodities through to the end of the 2015-16 dairy season and wholemilk powder prices are now only expected to reach US$2800/tonne by July 2016, AgriHQ dairy analyst Susan Kilsby said.
"The current outlook for the dairy markets means it is now unlikely Fonterra will be able to lift its farmgate milk price from its current forecast of $4.60/kgMS," she said in a commentary.
"There is ample supply of dairy product available in the global market and buyers generally have plenty of stock on hand so there is little urgency for them to secure additional stock."
The reduction in milk being produced in New Zealand is being offset by European dairy farmers producing more milk.
"Until global milk supplies drops further, prices are likely to remain subdued," she added.
The co-operative has forecast its milk production to fall of 5% this season and some commentators expect New Zealand's total production to fall by as much as 10%.
In addition, there are concerns that the current El Nino weather pattern will result in drought, which will further inhibit output.
The decline in New Zealand milk production gathered momentum in the month of September, according the Dairy Companies of New Zealand data.
Production, in milksolids, came to 209,484 tonnes in September, down 7.2% compared with September 2014, it said.
- By Jamie Gray, NZME News Service business reporter