Dairy prices rise at auction
There has been a big increase in prices at the latest Global Dairy Trade auction, with the average price rising 14.8 percent.
Whole milk powder, which is a major product for Fonterra, rose 19.1 percent on average, to US$1,856 per metric tonne.
Skim milk powder increased 8.5 percent to US$1,521 per metric tonne.
It is the first time prices have risen in five months.
"Fonterra's milk price forecast is now looking achievable," says AgriHQ Dairy analyst Susan Kilsby.
Fonterra is forecasting a payout to farmers this season of $3.85 per kilogram of milk solids.
But Ms Kilsby warns that "dairy commodity prices need to continue to track upwards in line with NZX Dairy Derivatives market projections in order to reach the current forecast price."
AgriHQ says the NZX Dairy Derivatives market, which trades contracts for the future delivery of dairy products, indicates whole milk powder prices will increase by a further 45 percent by the end of the season.
"This price projection is built into the AgriHQ 2015-16 Farmgate Milk Price of $3.85 per kilogram of milk solids."
Farmers and analysts had been expecting an increase in prices this morning. The trading of futures contracts for dairy products had suggested prices would rise after falling at 10 successive auctions.
Ms Kilsby says that ahead of the auction Fonterra reduced the volume of whole milk powder on offer at the August 18 auction by 33.5 percent compared with its earlier forecast.
"This hefty reduction in the volume available on GDT was the trigger required to turn market sentiment".
Fonterra is also predicting that its overall production will be down by 2 percent this season.
The co-operative is going to sell more than 70 percent of its product outside of the auction. The challenge for Fonterra will be to find buyers for all of that product.
"The bounce in GDT price exceeded market expectations, which appeared ambitious ahead of the auction. However, it may not be plain sailing from here on," Ms Kilsby says.
"Global dairy markets remain over supplied. Until global milk supply slows the market will remain very volatile."
AgriHQ says Fonterra still has a lot of product to move but it will be easier to sell that product now that prices have started tracking upward.