Falling global dairy prices hit Fonterra farmgate price

Fonterra (ASX:FSF) has downgraded its forecast Farmgate Milk Price (FMP) range from $9.30-$9.90kgMS to $9.10-$9.50kgMS as global demand for dairy products takes a hit on the back of Chinese lockdowns, the Russian invasion of Ukraine, and an ongoing economic crisis in Sri Lanka. 

Fonterra notes the midpoint range—the sum that farmers receive—has decreased by 30c from $9.60kgMS to $9.30kgMS, in a move the company acknowledges will be disappointing for farmers. 

Fonterra chief Miles Hurrell said today a conflation of factors reflecting short-term impacts on global demand for dairy products are to blame for the downward revision. While global events typically cause fluctuations in demand, the overlapping of significant events has proven to rattle markets. 

A graph showing changes to the GDT index (source: GDT)

Global dairy prices falling but silver lining intact 

Last month’s Global Dairy Trade (GDT) auction saw the price of dairy prices drop 8.5% at the fastest rate seen since 2015. 

New Zealand Stock Exchange senior analyst Amy Castleton told local media “buyers have finally had enough of paying high dairy commodity prices.” 

Despite the downward revision of 30c, the midpoint continues to be the highest forecast FMP in Fonterra’s history, Hurrell notes. 

The company expects to remain in a position to provide some $14bn toward the NZ economy through milk price payments. 

Fertiliser and energy costs to constrain production through 2022 

“Global milk production is expected to remain constrained as high feed, fertiliser and energy costs continue to impact production in the Northern Hemisphere,” Hurrell said. 

Despite persistent uncertainty, Fonterra has nonetheless contracted the majority of its milk for the season, according to the company’s chief. 

“There are a number of risks we are continuing to keep a close eye on,” Hurrell added, referencing inflationary pressure and rising interest rates may continue to impact demand dynamics, ultimately leaving open the very real possibility considerable volatility could continue to define global dairy markets for the foreseeable future. 

Fonterra's charts reflect the battering the company has taken since the invasion of Ukraine; China lockdowns