There is nothing like a movement in milk price to generate column inches and this week saw movement on both sides of the Tasman. Murray Goulburn in Australia stepped up their milk price while Fonterra in New Zealand reduced their payout forecast. It was a field of dreams too good to refuse for Xcheque.com. Demystifying confusion is our very much our shtick and just about everyone in the global dairy industry would be wondering what is going on here.

New Zealand going down

With the whole of New Zealand in a post-world cup state of drunken euphoria, plus a gas pipeline disaster costing $20 million per day, Sir Henry picked a good week for the announcement … “Perhaps we can slip this in without anybody noticing” … hmm, not likely.

Fonterra have reduced their forecast farmgate milk price from $6.75 to $6.30 / kg MS. The “forecast payout” is reduced to $6.70 - $6.80. The reduction in the forecast has been attributed to.

• Softening of international prices
• Foreign exchange volatility
• Increased supply from global competitors
• Reduced demand

The reduction of $0.45 / kg MS is a big drop considering the previous forecast was confirmed just a month ago. I do accept that the market is weaker than 6 months ago but I’m not really buying the latest spin. Not much has changed in the past 4 weeks. The GDT went up in the last auction and the problems in Europe have recently given Fonterra very good exchange hedging opportunities. Surely they knew what was coming??? Perhaps Fonterra didn’t want to put a dent in the national psyche before the end of the cup finals.

Perhaps I had a psychic moment of my own last week ⁽¹⁾ when I forecast a milk price for New Zealand in the range $6.25 - $6.75 / kg MS. Xcheque forecasts are for the total cash payout to farmers (milk price plus dividends). If you follow the trail of promises, the equivalent Fonterra forecast cash payment is $6.56 - $6.67 / kg MS – still at the upper end of the forecast range but we are definitely on the money.

For those of you still confused (“… wasn’t the forecast payout $6.75 already?”), you can brush up on the difference between the forecast milk price, forecast payout, cash payout and the relevance of exchange rate in a couple of articles I wrote last year ⁽²⁾.

Australia going up

Here in Australia Murray Goulburn announced a solid milk price step up of $0.08 / kg butterfat and $0.20 / kg protein. That is the equivalent of about $0.13 / kg MS or 1 cent per litre. Forgive me again if I am reading too much into this, but we know this must be good news because it was posted on the normally Spartan MG website news.

Milk price step ups at this time of year are becoming something of tradition for MG – perhaps because it gives management and the Directors something positive to take to the Annual General Meeting. But that can’t be right, it must be to give their suppliers confidence to plonk some money on the Melbourne Cup. Nevertheless, well done MG, the step up is timely and will be well received.

When compared with New Zealand, it is a bit more difficult to get a handle on the milk price paid to Australian farmers. The payment systems are complex and depend very much on the each farmer’s milk components and seasonal production profile. On our estimates this latest price rise brings MG farmers into the range of $4.65 - $5.25 / kg MS. This is a broad range and if we were to take a closer stab at it we would say that the average MG farmer would be getting something in the range of $4.90 - $5.10 / kg MS.

Closer examination of the news reports showed that it was not not all good news for southeast  Australian dairy farmers. It is important to understand that in Australia the primary focus is on the current price paid. There are progressive price step ups through the year with backpay to the start of the season. When these step ups occur the industry reports the actual current price.  There is always associated speculation on what the final price will be. It is only in the past two years that Murray Goulburn has come out with a public forecast of the end of season price. This delayed payment system also applies in New Zealand but the primary focus there is on Fonterra's forecast final price (the actual price paid in NZ at any given time is a bit of a mystery to most people).

MG’s initial full year forecast was for a milk price in the range $5.30 - $5.50 / kg MS. They have revised this to the low end of the range. New Managing Director, Mr Gary Helou is reported to have said:

“We have reviewed our forecast final weighted average milk price for 2011/12 provided at the start of the season. Given the current uncertainties in the market place, we believe the final weighted average milk price should be around $5.30kg per kilogram of milks solids, which is at the lower end of our previously indicated range."

Again, Xcheque is looking good at $5.00 - $5.50 / kg MS even if some of you would say that you could drive a truck through that forecast price range.

And Oceania meeting in the middle

Comparison of New Zealand and Australian milk prices has its complications ⁽³⁾. There is the matter of the exchange rate but in addition the basis of component testing is different. A kg of milk solids in Australia is not the same as a kg of milk solids in New Zealand.

Xcheque’s global milk price calculator provides our readers with a guide to the cross Tasman dairy exchange rate. By our estimates $NZ 6.60 / kg MS is equivalent to $AU $5.12 / kg MS at today’s exchange rate of $NZ 1.30 to $AU 1.00. That is at the upper end of our estimates for Murray Goulburn’s current price and $AU 0.20 / kg MS below MG’s new full year price target.

After a couple of years of setbacks, could it be that Australia is going to take out the Trans-Tasman milk price cup this year? It is too soon to tell, but if that was the case, it may provide some compensation for being creamed in the rugby world cup semi-final.

(1)    “US feed prices – what do they mean for Oceania dairy?” Dr Jon Hauser, Xcheque.com 24^th October 2011

(2)    “Magic in the air – have Fonterra pulled a rabbit out of a hedge?” Dr Jon Hauser, Xcheque.com 25^th September 2010

“Fonterra’s rabbit becomes a golden goose” Dr Jon Hauser, Xcheque.com 25^th September 2010

(3)    “Making sense out of units of milk price” Neil Lane, Xcheque.com 18^th January 2011

“In dairy, oils ain't oils and proteins ain't protein” Neil Lane, Xcheque.com 5^th February 2011