Fonterra has set the June guaranteed milk price (GMP) at $5.25 per kg for milk solids (MS), the same price as the opening 2015 to 2016 forecast farmgate milk price.
The farmgate milk price decrease from $8.64/kg milk solids in February 2014 to $4.40 in May 2015 spells a drop in retail milk prices and further falls expected.
Fonterra Group director for co-operative affairs, Miles Hurrell, said: “More of our farmers are seeing GMP as a financial risk management tool and are choosing to lock in a price for a percentage of their milk production.
“We received a good range of applications from small to large farmers from throughout New Zealand, who will now be able to use this income certainty to help to better budget and plan for this season.”
Farmers had the opportunity to apply for a GMP for a percentage of their estimated production at one or more of five prices at and below the opening forecast farmgate milk price. The applications totalled 45.2 million kgMS, which exceeded the 40 million kgMS available for GMP agreements.
Because the program was over subscribed, applications were accepted from the lowest price upwards, with applications at $5.25 scaled back by 16.5 per cent.
Fonterra will use the certainty from GMP to lock in longer-term supply contracts with key customers at set prices, attracting an additional premium, which can help to secure a more stable EBIT return for all farmers, paid through the dividend. This is the first of two opportunities to lock in a GMP in the 2015 to 2016 season. The second opportunity will be in December 2015.
Rabobank research analyst Emma Higgins said consumers were now starting to see the effects of this at the retail end.
Retail prices do not tend to follow the sometimes highly volatile dairy price commodity markets and any retail prices are largely dependent on the time it takes for commodity prices to filter through from farmgate prices paid to the processors. That delay usually takes six to eight months.
Provided that dairy commodity prices remain low for an extended period of time, consumers can expect to see lower retail prices.
“The good news is that we are beginning to see a modest adjustment to retail pricing now,” said Higgins.
That is backed by data from Statistics NZ, which shows the monthly average price of a standard two litre bottle of homogenised milk was $3.45 in May after hovering around $3.61 to $3.64 for the previous 12 months.
If commodity prices stay low this season, the likelihood of retail prices remaining low for a longer period of time is also likely, Higgins said.
Countdown said its Homebrand two litre bottle of milk has fallen over the past few months from $3.39 to $3.19.
Likewise, Foodstuffs, owners of Pak ‘n Save and New World, confirms it has also dropped its retail milk prices in May.
“These reductions are in line with the price reductions we received from our suppliers,” Foodstuffs NZ corporate PR director, Antoinette Laird.
“On average we reduced our milk prices by six per cent on fresh white milk.”
