NZ dairy farmers face tougher times with forecast payout

Last week’s global dairy auction saw milk prices fall to 5 year lows with the price of whole milk powder falling to $2,875 per tonne which is a 10.9% drop from the previous event. This price indicates a current surplus of fresh milk in China, resulting in elevated levels of local production of whole milk powder, and reducing near-term whole milk powder import requirements – reduced demand from China. With this in mind Fonterra has cut its farmgate milk price forecast and expects to pay farmers between $6 and $7.50 per kilogram of milk solids this season. A lower milk price is going to further squeeze dairy farmers with DairyNZ estimating the average farmer would need $7.51 per kgMS to break even. It is estimated that the drop in milk price will lower farmer incomes by about $2.2 billion, denting rural spending and weighing on the wider economy.

These prices are generated by the GlobalDairyTrade which is an auction platform for internationally traded commodity dairy products. How does it work?

GlobalDairyTrade trading events are conducted as ascending-price clock auctions run over several bidding rounds.  In each auction a specified maximum quantity of each product is offered for sale at a pre-announced starting price. Bidders bid the quantity of each product that they wish to purchase at the announced price. If the price of a product increases between rounds, to ensure their desired quantity a bidder must bid their desired quantity at the new, higher price. Generally, as the price of a product increases, the quantity of bids received for that product decreases. The trading event runs over several rounds with the prices increasing round to round until the quantity of bids received for each product on offer matches the quantity on offer for the product (as shown in the diagram below). Each trading event typically lasts approximately 2 hours.

Bidders cannot join a trading event part way through: they must participate in round 1 and can only maintain or decrease their total bid quantities from that point. Products can be purchased over different delivery time periods, known as contract periods.

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GlobalDairyTrade