Fonterra milk price step up and opening released

The increase of 10 cents a kilogram of milk solids takes its 2021/22 average price to $7.40/kgMS, and an opening weighted average farmgate milk price of $8.25/kgMS for the 2022/23 season.

Fonterra Australia milk supply general manager Matt Watt said the price was released well ahead of the June 1 deadline set by the mandatory code to offer farmers a "line of sight" so they could make business decisions with more confidence.

He was keen to emphasise though that the $8.25/kgMS price was only the minimum it would offer for the season and prices would be reviewed in June.

"A lot of our key contracts for next season are not locked in now, which means that neither the contract nor the currency that sort of goes with that can be can be committed to so once we've done that, which is early June, we can then reassess," Mr Watt said.

Factors to watch would be the impact of China's COVID19 lockdown and the uncertainty created by the Russia-Ukraine conflict on demand, rising manufacturing costs and shipping disruptions.

Shockwaves have been sent through commodity prices, falling 13.4 per cent over the last four Global Dairy Trade auctions.

Mr Watt said both Fonterra and farmers had also been affected by labour shortages and rising input costs.

"We're hearing of increases between 80 cents and $1.20 a kilo in terms of on farm costs going into the next season," he said.

"What they're also saying is that in the last couple of years, particularly comparable to previous periods, the margins have been there.

"The challenge is can we continue to maintain the middle price at a level that supports those increased cost levels coming up from underneath?"

Fonterra was working with farmers to ensure inputs like fertiliser were used to maximum effect and, while he said the company would wait to see how those pressures might impact milk supply.

"As we look into our future, being able to produce products sustainably is going to be an incredibly important part of our value propositions, it's what our customers, what our stakeholders want to see," he said.

"We've started to do more and more work behind the farm gate to understand what that looks like because those sustainability credentials are undoubtedly a part of our future.

"So I think we'd need to tackle that and accept that some of the consequences around production volumes and farming systems will also need to be considered in that landscape."

Mr Watt said he was particularly pleased about the newly-announced step up.

"I feel really good about that because it means we've got a business system that is earning a price and payment through to farmers in the market," he said.

It was a sentiment echoed by Fonterra Australia Suppliers' Council chair Alan Davenport, who farms at Derby, Tasmania.

"It's really good to see that Fonterra not only opened with a strong price but are closing out this year with a recognition of the fact that they've made good returns out of the Australian markets and prepared to share those returns fairly with their suppliers," he said.

"There's been no really strong market competition to force Fonterra to make this step up.

"It is them being consistent in their commitment to pay what the market return is, and hopefully people will start to understand that opening prices, while important, aren't the key; the closing price is what really matters."

Fonterra has several milk pricing models but Mr Davenport said the $8.25/kgMS figure was important.

"This is the underpinning milk price, so this is basically where the buck stops," he said.