By David Hargreaves
A flat overall result in the overnight GlobalDairyTrade auction, but with, more worryingly, the second consecutive fall in the price of the key Whole Milk Powder, points to the new season being a continued slog for dairy farmers.
The WMP prices slipped 4.5% to US$2118 per metric tonne. This followed a 2.1% fall in the previous auction at the start of this month.
It means that the WMP prices have fallen by nearly 6% in the past two auctions.
In the last auction for 2015 the WMP price was US$2304/mt, so today’s prices are still some 8% down on that level, which demonstrates that the anticipated lift in prices is slow coming.
However, these figures are not the whole, or even a completely accurate, picture.
According to Reserve Bank figures the Kiwi dollar was worth US68.48c at the end of 2015. However, by the end of January 2016 the Kiwi was sitting down at US64.82c.
Since then, however, things have turned. At time of writing the NZ dollar was worth US70.34, which is about 8.5% higher than it was at the end of January.
At the last dairy auction in January the WMP price was US$2188, so today’s price was 3.2% down on that level. However, if you convert the two prices into New Zealand dollars it can be seen that at the prevailing exchange rate of US64.50c on January 19, the day of the auction, the WPM price was NZ$3392/mt.
Today’s price of US$2118 converts to NZ$3011/mt.
So, on that basis, the WMP price is 11.2% lower than it was at the end of January.
Fonterra is expecting gradual improvement in prices as the season goes on, and has given an opening milk price forecast of $4.25 per kilogram of milk solids.
Many economists are expecting a better price than that ultimately. However, ANZ economists said at the time the opening forecast was given on May 26 that while they were inclined more toward the high $4/kg MS as an ultimate season-end price, the price action in the July/August period would be critical. Something in the high $4/kg MS would involve the NZD/USD trading around the mid-0.60 cents and wholemilk powder prices heading back to around US$2,500/mt, they said.
Clearly we are a long way away from such a scenario at the moment.
The Reserve Bank, while again talking of the need for a lower Kiwi dollar, left the Official Cash Rate unchanged at 2.25% last week. Nervousness about the Auckland housing market was perceived as the biggest reason for the non-move.
Key potential developments for the Kiwi dollar before the RBNZ makes its next call on interest rates here on August 11 are next week’s European referendum vote in the UK and the next US Fed decision toward the end of July.
It’s probably fair to say that the RBNZ will be hoping from the NZ dollar perspective that ‘something gives’ before it has to make that August 11 call. The dairy farmers will be hoping so too.