After product volumes surged in a market that was already saturated, the price of whole milk powder plunged to levels last seen in 2016 at the most recent Global Dairy Trade auction.
The price of whole milk powder has the biggest influence on farmgate milk prices.
The index for skim milk powder dropped 5.2% to US$2333 per tonne, while the index for butter fell 3% to US$4539 per tonne.
The whole milk powder’s average cost dropped to 10.9% US$2548 per tonne (NZ$4281).
This year the demand from China was significantly reduced and analysts predicted that demand from the recovering market would be likely remain below.
Fonterra reduced the anticipated milk from 2023- 2024 season by $1 earlier this month due to weak demand.
The co-operative announced a revised farmgate milk price range of $6.25 to $7.75 per kilogram of milk solids, with a mid-point of $7 per kgMS.
This was down from a May announcement when Fonterra said it expected to pay farmers between $7.25 and $8.75 per kgMS, with a mid-point of $8 per kgMS.
Since then, dairy producers have closed their wallets.
Nathan Penny, a senior agri economist at Westpac, claimed that the market had not anticipated such a precipitous drop.
“Prices have been under pressure, we expected that to continue, but not to this degree,” Penny said.
A major contributing factor to the decline, according to him, was Fonterra’s announcement prior to auction that it would raise amount of product an offer there by 11% and the amount it expected to offer following 12 months by 6%.
“That’s a pretty large increase that took the market by surprise.”
Fonterra mentioned only changes in the market and demand as reason for increase, according to the penny, but there have been further two factors at play when cooperative decided to boost its product offering.
