“GDT [Global Dairy Trade] prices have fallen 11% across the reference products that inform the farmgate milk price since we announced the opening forecast in late May, while milk production from key exporting regions is up on last year.
“We’re expecting a strong start to the season in New Zealand, noting the potential for the El Nino weather pattern to impact global supply as the season progresses.
“It’s very early days in terms of the proportion of our 2027 sales book that has been contracted, so we face significant exposure to changes in commodity prices,” Allen said.
“As the seasonal supply picks up, our plan will ensure we utilise our flexible operations footprint, strong customer relationships and robust supply chain to shift milk into the products and markets where we can get the best returns for our farmers’ milk.”
Michael Gordon, senior economist at Westpac, said that as it was still very early in the season, the bank would not change its $9.50/kg forecast.
“We’re recognising the downside risk to that, but it’s not enough to warrant a change of forecast just yet,” he said.
“There’s a reason Fonterra starts with a $3 range around its forecast.”
Gordon said a “super” El Nino weather pattern had the potential to disrupt production around the world.
Today’s announcement from Fonterra follows last week’s GDT auction, which showed the GDT price index fell by 4.9% – the largest decline in two years.
At the auction, key wholemilk powder prices dropped by 4.4% to US$3425/tonne and skim milk powder by 7% to US$3135/tonne.
Global milk production in the year-to-date had shown strong growth across all major milk producing regions bar China, NZX Dairy said in an analysis.
The excess supply of milk in the market had put natural downward pressure on both wholemilk and skim milk powders.
“Looking ahead, recent market developments on the global milk production scene show early indications that the year on year production growth trajectory is starting to change,” NZX Dairy analyst Rosalind Crickett said.
Heatwaves across Europe have proved a hindrance to productivity most notably in France and Belgium with some heat-stress related dairy cattle fatalities also reported in Jersey, Crickett said.
El Nino conditions arriving in the tropical Pacific last week could further add to the production output decreases in the months to come, she added.
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.
Stay ahead with the latest market moves, corporate updates, and economic insights by subscribing to our Business newsletter – your essential weekly round-up of all the business news you need.