Insight Focus
NZ milk collections started the season strongly. Non-Fonterra processors are gaining market share while Fonterra restructures its branded business. Butter markets remain volatile, but milk powder prices are stable despite high offer volumes. EU butter production rises but domestic demand softens, with FX pressures weighing on SMP competitiveness.
Strong Start to NZ Milk Season
August milk collections rose 2.5% year over year to 126.9 million kgMS, after July was also up 2.2%. August collections mark the first indicator for the coming season, and this is a notable start!
Non-Fonterra processors were up 6% YoY in July. We anticipate they will be up 2.2% for August, giving them a monthly market share of 20.8%. August is typically the seasonal low point for this bloc’s share. We expect the group to continue steadily gaining share and to finish the season at around 23.5% of all milk collected.
NIWA reports that August was dry across much of New Zealand, with rainfall below normal in all regions. In contrast, September has so far been very wet, with repeated heavy downpours and weather warnings.
While soil moisture had normalised by the end of August, most of the country is now wetter than usual as temperatures rise. These conditions should support strong spring pasture growth.
While WMP prices have dipped to 10-month lows, they have generally held up surprisingly well given strong milk production. Offer volumes are now at the seasonal peak. Milk powder purchases by China, Southeast Asian, and MENA buyers have been particularly strong in recent GDTs, largely believed to be restocking inventories. Chinese demand for Butter/AMF and Cheese has also remained strong through GDT Event 388.
Even after recent declines, WMP futures are trading about USD 300/tonne above the calculated long-run mean. Based on price alone, in the absence of other factors, there should be some downward pull.
Fonterra won the lion’s share of the August ONIL WMP tender at aggressive pricing, surprising many. Since then, several significant below-GDT WMP sales have been made by New Zealand processors, with particularly aggressive pricing into Libya, Taiwan, Indonesia, Thailand and Malaysia. According to Infobae, there may also soon be growing stocks of Argentinian WMP in need of homes.
Australia’s dairy sector is under pressure from drought in the south and floods in the north. These conditions have hampered pasture growth, tightened water availability, and increased feed costs. Output is falling despite higher farmgate prices, while culling rates have risen. Expect Australia to continue importing more dairy.
Fonterra Offloads Brands as OCD Expands
In a two-week flurry from August 18 and September 1, OCD announced the purchases of both Mataura Valley Milk in Gore and Miraka near Taupo. This should provide OCD significant processing optimisation benefits, moving them more toward a Fonterra-style processor (see maps below). These acquisitions lift OCD’s total milk production to 205–235 million kgMS, or roughly 11–12% of all NZ collections for the new season.
Fonterra has also announced the sale of its global branded businesses to Lactalis. It has sold off EBIT risk. The New Zealand milk price is regulated and set by GDT returns for five highly volatile commodities (WMP, SMP, Butter, AMF and BMP). Because this price effectively represents Fonterra’s cost of goods sold (COGS), volatility feeds directly into EBIT for branded businesses.
In rare cases, this can even push branded margins negative in high milk price years. While branded products typically enjoy higher margins, limited pricing flexibility keeps earnings volatile, in turn affecting dividend stability.
Shareholders generally want predictable EBIT that ideally grows steadily over time. While branded businesses should deliver higher margins on average over time, Fonterra has chosen to sell its brands with supply agreements (duration unclear). This signals that it values the predictability/stability of earnings more over notional farmer payout (milk price plus dividends).
Fonterra farmer shareholders will vote on the proposed sale of its consumer and associated businesses to Lactalis in late October or early November. Approval requires a 51% majority, and the deal is also subject to regulatory approval and separation of the businesses.
EU Butter Output Rises Amid Price, Export Pressure
Cumulative EU butter production from January to July 2025 totalled around 1.3 million tonnes, up 2.4% year over year. Almost a quarter was produced in Germany. All major EU butter producers increased output in the first half of the year, and August production was reportedly also significantly higher.
Headline exports appear stable but are inflated by Ireland front-loading shipments to the US. Adjusting for the additional 9,000 tonnes sent to the US this year, EU butter exports would actually be down about 7% year to date—a much weaker picture.
According to USDA, EU domestic butter demand is set to rise 0.6% this year, though anecdotal reports suggest demand is actually falling. The net result is extreme downward pressure on EU butter prices—for example, the October EEX contract is down about EUR 2,000/tonne on an ex-works basis in just six months.
FX remains the main driver of EU SMP competitiveness. Without the expected currency reprieve, EU SMP will likely come under pressure.
While milk intakes showed a slight seasonal decrease, favourable weather throughout the month supported output, making the seasonal drop weaker than expected. Limited demand and reduced processing capacity during the summer holiday period led to falling spot milk prices throughout the month.
US Butter, Cheese Markets See Export Surge
Farmer sentiment continues to weaken overall, but a record-breaking corn yield forecast has improved the income-over-feed-cost outlook.
Chinese demand for US lactose has returned, causing prices to rebound.
US butter exports reached a decade high (up 206% year over year), with shipments to Australia and the EU booming due to a 40% discount to European benchmarks. While the US is not tightly correlated with EU and New Zealand butter markets (67% and 58% respectively), the charts speak for themselves. Both US–EU and US–NZ spreads remain at the third percentile, though the EU–NZ has crashed back to more normal levels.
The Class III–IV spread benefits farmers in cheese-producing regions, supporting herd expansion to supply new and growing cheese plants, though it continues to weigh on overall prices.
The US dollar has weakened against emerging-market currencies retreating from December–April highs back to Oct’24 levels. This improves emerging market purchasing power and should support demand for USD-denominated exports, including US and New Zealand dairy.
Dairy Derivatives Market Highlights
Firstly, SMP intermarket spreads.
New Zealand SMP is typically cheapest in August, briefly dipping below EU values before regaining a premium later in the season. This year, however, New Zealand SMP is discounted not only to EU but also to US origins—an unusual situation.
Relative to CME, New Zealand SMP looks especially attractive, with the US market trading at an 80th percentile premium. While New Zealand is also good value versus EU right now, this is a somewhat ‘normal’ pattern for the time of year.
Secondly, volatility.
Most milk powder futures are trading at lower volatility than normal. SGX SMP volatility dropped to a four-year low of 8% before spiking back to average.
If options can be bought at or near prevailing implied volatility, they would represent good value historically.
