Global dairy prices rose strongly for the second consecutive auction

By David Hargreaves

Dairy prices rebounded again at the latest GlobalDairyTrade auction held in the early hours of the morning.

The average price achieved at the latest auction for all products was $2226 per metric tonne, which on an unadjusted basis gave a rise of nearly 12.8% from the $1974/MT at the last auction. The GDT Index, which measures all products, but makes certain adjustments to give a value-weighted average of price, was up 10.9%.

The key whole milk powder (WMP) prices climbed back above the $2000MT mark, with a 12% gain to $2078.

However, while the latest rally in prices, following on from a 14.8% rise in the GDT Index in the auction two weeks ago, will be encouraging for farmers, it needs putting in perspective.

The rises in the last two auctions have basically only taken prices back to the levels they were in June, at which point we were in the middle of 10 consecutive auctions of price falls. The GDT Index, even after the latest gain, is some 32.2% lower than it was in March after there had been something of a rally in prices due to expectation of lower production in New Zealand on the back of a drought. In the event the effects of that drought were quickly overcome and milk production in the past season was actually higher than in the year before.

ANZ senior economist Mark Smith and economist Dylan Eades said the WMP prices at the latest auction were still below the US$2200 required to deliver Fonterra’s $3.85 per kilogram of milk solids for 2015/16, “but are moving in right direction”.

They said the volumes sold at the latest auction (35,865 MT) were down on the 36,904 MT sold in the previous event and well below the 57,010 MT sold this time last year.

The recovery in the prices at the last auction and the latest one came following drastic action from Fonterra to reduce the amount of product, particularly WMP, it makes available through the GDT. Fonterra’s managing director global ingredients, Kelvin Wickham says Fonterra is now selling approximately 70% of its total product via channels other than GDT “and as a result we do not expect a material impact on inventories”.

Westpac economists indicated that they would be revising their milk price forecast upward later today (from a current pick of $3.70).

But Westpac senior economist Michael Gordon said they were “hesitant” about assuming further substantial price gains in coming auctions, as the milk supply situation remained unclear.

“The global dairy market has so far reacted strongly to Fonterra’s forecast of a 1.5% drop in milk collection for this season. But for higher prices to be sustained, dairy farmers will have to live up to that forecast over the coming months. We also need to see the other major dairy-exporting nations join in – the somewhat dated figures we have at present (up to June) show an acceleration in Northern Hemisphere milk production, not a slowdown,” he said.

ANZ’s Smith and Eades said low prices were expected to continue to take their toll on production.

“…Putting aside weather events – we expect a slowdown, via fewer herd numbers and less use of supplementary feed.

“However, as yet we are not seeing a decline in supply from the US or Europe. With oil prices falling sharply overnight (partly reversing earlier moves), it will take more than concerns over supply to provide meaningful lifts in commodity prices; demand will also need to come to the party.

“All eyes remain on China to provide more demand-side spine. But recent equity market volatility and the soft data pulse are not good signs.”

‘First leg of trifecta nears completion’

Meanwhile, ASB rural economist Nathan Penny said sentiment has turned and additional significant price increases are now effectively contingent on weaker New Zealand production.

“The first leg of the dairy price trifecta is nearing completion. Namely, dairy market sentiment has turned. And prices have mostly regained the losses incurred over July and August. Attention now squarely turns to the second more difficult leg of dairy price trifecta. Namely, a drop or material slowing in NZ dairy supply,” said Penny.

“At this stage, we expect production to fall. Farmers have culled aggressively so far this year, supplementary feed is uneconomic for most, and there is high risk that el Niño causes a drought this summer. On this basis, we forecast this season’s production to fall 1% compared to last season.”

“But over the next few months, we expect price increases to slow. Moreover, markets are yet to be convinced that NZ production is slowing. They prefer cold hard data to forecasts, and data to confirm weak production may not be available for several months. This fact highlights that there is still a long road ahead in the dairy price recovery,” Penny added.

ASB’s economists are sticking with their $4.50/kg forecast for this season.