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Fonterra cuts milk price forecast, blaming 'strong' EU output

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Fonterra cut its milk price forecast, despite giving up on hopes for a recovery in New Zealand milk production this season, and the revival in values overnight at the latest GlobalDairyTrade auction.

 

Fonterra, the world’s biggest dairy exporter, lowered by NZ$0.35 per kilogramme of milk solids to NZ$6.40 per kilogramme of milk solids its forecast for farmgate milk prices in New Zealand in 2017-18, on a June-to-May basis.

 

The downgrade came despite a further cut, to 1.525bn kilogrammes of milk solids, in its forecast for collections for the season, from a previous estimate reduced in October to 1.54bn kilogrammes of milk solids.

 

With Fonterra responsible for processing the vast majority of New Zealand milk, the co-operative’s collection figure is taken as a proxy for the country’s output.

 

Fonterra cited “ongoing challenging weather conditions” in New Zealand, where output has been tempered first by an unusually wet spring, followed up by undue dryness in many areas, leaving the 2.9% growth reported for the month of October as the weather changed looking increasingly like an outlier.

 

‘Strong production out of Europe’

 

With New Zealand the world’s biggest milk exporting country, a drop in output volumes is seen as supportive for world and domestic prices, often providing some consolation for the country’s farmers.

 

Fonterra also noted “strong” demand for dairy, “particularly in China, other parts of Asia and Latin America”.

 

However, the co-operative flagged pressure on values from raised output in the European Union, the world’s top producer of cow’s milk, and also a major dairy exporter.

 

“What is driving this [reduced price] forecast is that… we are seeing strong production out of Europe,” where output for September, the latest month available, rose 3.7% year on year, according to European Commission data.

 

‘High stockpiles’

 

Fonterra also cited price pressure from “continued high levels of EU intervention stockpiles of skim milk powder”.

 

The EU has some 400,000 tonnes of skim milk powder in storage, thanks to an intervention buying scheme which is broadly expected to be reviewed next year.

 

The extent of the inventory has depressed prices of the product in the EU – where they stand at E151 per 100 kilogrammes last month, the lowest on data going back to 2001 – and worldwide.

 

This has also played a role in the butter rally too – with the weak values of skim milk powder, the typical byproduct from butter output, deterring production of the fat, which has in turned squeezed supplies.

 

Auction prices

 

In fact, skim milk powder prices rose at the GlobalDairyTrade auction on Tuesday, by 4.7% to an average of $1,774 a tonne, their strongest performance in six months, and helping the overall index rise by 0.4% despite a collapse in butter prices.

 

Butter values plunged by 11.1% to levels last seen in January, and taking to 24% their slump from a record high reached in September.

 

However, the GlobalDairyTrade index remains nearly 10% below levels in mid-September, the last time that Fonterra issued a milk price forecast.

 

Some commentators have forecast New Zealand farmgate milk prices averaging NZ$6.25 per kilogramme of milk solids, or less, this season.

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