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.
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24 Comments
I think Fonterra have to indicate their volumes 3 months out from each auction.so in may/june if they thought prices might be flat would it not be prudent to cut back on amount offered for auction?
KoW your moniker is well named..its a bit of good news in amongst an overall bad news day ..
Is it good news? If the price is only rising because fonterra are withdrawing product, what signal is this givivg to overseas producers? ...... keep producing things are coming right. This is not what needs to happen, they should be dumping product to give the market the right signals, which is there is an oversupply therefore we need to cut production.
so tim your soulution is to crash the price completely and hope nz farmers can out last the rest of the world.?Thats a risky game ,made harder by the fact that the playing field is not level and govts overseas may come to the aid via more subsidies.(not likely to happen here).What happens in 1-2 years time when prices rise again but we have no viable farmers left to take advantage? all the whingers on here would be blaming Fonterra for sending all and sundry to the wall..
I am another one of the "whingers" Don m.
Please put your positive spin on this: http://money.cnn.com/data/world_markets/asia/
Since when has being observant and realistic about the state of the economy whinging? Only fools put their heads in the sand.
It ain't actually that rosy Don m.
Just so Triple. No doubt when things continue downwards Don will be along again to ask us 'Whocouldanode?' and 'Whywerentwewarned?' or variations on some such theme.....
Sitting round with your hands over your eyes and singing Kumbaya all day does not help in making realistic economic judgements, and is likely to lead to the poorhouse.....
I am unsure what you are saying here but I cant see how NZ's milk industry can continue to bleed money probably for years. The only option to me is we drop production back to a price we can afford to make it at under the market price and let the least indebted farmers survive doing so. To me any other option would cause even more damage tot even more farmers and NZ.
Before commenting Kow and triple perhaps you should read my post and reflect on what I said.
I said it was a bit of good news on otherwise a bad news day so I wasn't trying to spin the state of the economy at all
note that on most msm sites/papers the Fonterra result would have been buried in the back..but if the auction had dropped it would be front and centre bemoaning yet more pain to come.
my suggestion to tim was that dumping product into an already depressed market was probably not the wisest stategy.I accept some farmers will not come through this current downturn.,but crashing the system will send more broke than was necessary.
By all means if you guys have some solutions to the worlds current problems then feel free to share ..rather than bitch about it
The problem then is similar to the one Saudi Arabia faces given the US shale production over-supplying the market with expensive oil, drilled with junk bonds. The US shale players expected Saudi to cut back to hold the price up allowing the US shale players to make a killing, Saudi called thier bluff as it was going to hurt either way, ie less income from selling a lot less or less income from selling more for a lot less. Saudi is using its reserves and borrowing. The latter of course allows a return shot at the shale players sending some if not many bankrupt. Funny thing but the investors and shale players blamed Saudi.
Does fonterra have this option? to crash the price? no, ergo our output has to get as efficient as possible to survive, that means dropping production back from its artificial highs pushed there by non-grass feeds. I cant see how this is going to end quickly or painlessly.
Fonterra only cut back what they are offering on the GDT platform. I very much doubt they have stopped selling directly (ie not via the platform). The GDP platform will be setting the price expectations for those non-auction sales however.
Fonterra never offered all its product through the auction platform - far from it.
In a year, NZ dairy farms produce about 1.9 mln tonnes of milk solids. Fonterra represents about 1.7 mln of that. But they only offered around 800,000 tonnes of product through the GDT platform in the past year (a record).
Much (most?) of what Fonterra sells will be via long-term, direct sales commitments, and no doubt those commitments will reference the 'market price' in some direct way.
it seems only us that have legislated/elevated gdt price to the importance we give.
e.g. from last month
https://www.globaldairytrade.info/en/announcements/land-olakes-withdraw…
Land O’Lakes first joined GDT in March 2014 offering Skim Milk Powder. They last sold product via the GDT platform on 20 January 2015, and have not offered product via the platform for the last six months. They have now decided to focus resources on other sales channels for this product range.
GDT Director Eric Hansen said “We understand the reasons for Land O’Lakes decision and we would certainly welcome them back in future should they wish to utilise our service.”
DC, have you got a spare intern for a bit of translation?
Dakang Farming (02505 Shenzhen) aka Pengxin Group, put out the half year to June a week or 2 ago.
revenue for the Jun quarter revenues seem to have gone up by 5 x's
if bloomberg are correct
http://www.bloomberg.com/research/stocks/financials/financials.asp?tick…
however looking at the source:
http://disclosure.szse.cn/finalpage/2015-08-12/1201422671.PDF
its 133 pages of the local script?
http://disclosure.szse.cn/m/drgg_search.htm?secode=002505
seems a shame that OIO couldn't rule that where listed, OIO folk make the English version easily available.
Having said that the discussion and comment from the report would be interesting.
Do you think the big/local boss would have an office copy in English?
as per my comment on Saudi, ie Saudi has huge reserves in USD and can borrow, farmers and fonterra cannot, especially given their already over-indebted levels to keep production up and low.
The only option left then is to cut production back to the high efficiency model and rid it out. Some wont survive this but hopefully most will.
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