ASB cuts forecast Fonterra milk price payout to $4.70kg, ANZ sees pre-Xmas forecast cut from Fonterra

ASB has lopped 40 cents off its 2014-15 Fonterra milk price forecast, and ANZ is suggesting dairy farmers will receive an unwanted Christmas present in the form of a reduction in Fonterra's own forecast payout.

These comments come after dairy prices fell 5.2% in New Zealand dollar terms, and 3.1% in US dollars, in last night's GlobalDairyTrade auction. Prices are now at a five year low.

ASB senior economist Chris Tennent-Brown described the latest auction as weak where it mattered.

"All up the Global DairyTrade price index fell 3.1%. The prices of key products whole milk powder (WMP) and skim milk powder (SMP) both fell over 5%."

"This fall was on the back of earlier signs of life, with WMP up nearly 5% over the two auctions prior. Those gains have now been wiped. Casein prices also fell over 12%, in addition to the significant WMP and SMP falls. Bucking the trend were Anhydrous Milk Fat (AMF), butter, Butter Milk Powder (BMP) and cheddar, posting rises of between 1.4% and 6.1%," Tennent-Brown said.

"Overall prices are now down nearly 47% in annual terms. The falls for WMP and SMP are larger, both having declined over 50% since November 2013. Last night’s fall was also the 17th out of the last 19 auctions."

On top of this Tennent-Brown points out the price falls come with Fonterra having reduced auction volumes in an attempt to boost prices. Fonterra’s forecast auction volumes for the 12 months ahead has fallen by 14% since June.

"But the market isn’t buying. Fonterra’s milk production remains up over 4% for the season to date (and 6% nationwide). There is still plenty of milk to go around."

Based on all this, ASB has cut its milk price forecast by 40 cents to $4.70/kg of milk solids. This new forecast features a much more protracted recovery in prices, Tennent-Brown says, adding ASB still expect prices to rise during 2015.

ANZ's economists, meanwhile suggest dairy farmers now appear set to receive an unwanted Christmas present, with Fonterra likely to cuts own 2014-15 forecast milk price from $5.30/kg.

"Given the required run rate and the view of a later recovery our current forecast is for a $4.85/kg milk solids milk price in 2014/15," ANZ says.

"That means the December board meeting could be a doozy again this year. Last year there was a dramatic cut to the dividend and hike in milk price. The opposite could well occur this year, especially with some GlobalDairyTrade product recently being sold via other channels for an extra premium and the persistent weakness in milk powder prices versus non-reference products. Not that the share price has been jumping for joy, but something worth watching," ANZ's economists say.

They also noted  persistent weakness in milk powder prices had "cemented" farm-gate prices in the low $4/kg milk solids in the past four auctions.

"Given that this is the peak sales period this will weigh heavily on the outlook for the season. We believe a stronger turnaround won’t be forthcoming until the middle of next year for several reasons. Farm-gate prices have not adjusted materially lower in Europe and the US as yet, meaning suppliers are not receiving the signal to cut supply; lower grain prices are also helping Northern Hemisphere margins; Russian sanctions are continuing to rattle the market as evidenced by the one-way traffic for skim milk powder prices; demand in some key markets remains lackluster; and we’ve seen good seasonal conditions in New Zealand and Australia so far," ANZ says.

Westpac has a $4.80/kg 2014-15 forecast, and BNZ a $4.90 one.