Bank economists expect the price of whole milk powder to rise by as much as 10% at Wednesday morning's GlobalDairyTrade auction

Bank economists expect the price of whole milk powder to rise by as much as 10% at Wednesday morning's GlobalDairyTrade auction

ANZ, ASB and BNZ economists are expecting dairy prices to rebound slightly at Wednesday morning’s GlobalDairyTrade (GDT) auction.

Of most significance ASB expects the price of whole milk powder (WMP) to increase by more than 10%, while ANZ is picking a 5% to 10% rise.

The WMP price fell 10.3% at the last auction a fortnight ago, and has dropped a whopping 32.4% during the last three auctions.

Meanwhile, average winning prices sank 9.3% at the August 4th auction, settling at levels last seen in the 2002-03 period.

ANZ economists say prices have bottomed, and a turning point is coming.

“This week, we should receive confirmation that global dairy prices have bottomed (found the bungy cord attached), but any bounce must be put in context of current depressed levels and the need for prices to recover a long way before Fonterra’s new payout estimate will be hit, let alone domestic farmer profitability restored”, they say.

ASB economists say; “Markets have begun to bid prices higher on the likelihood that New Zealand production will fall this season compared to last.

“Moreover, with Fonterra reducing by a third the forecast WMP volume on offer at this auction, the price lift may not stop there.”

Fonterra last week announced it would cut the amount of WMP it sells on the GDT by a third over the next year, due to persistent low prices.

ANZ economists say; “Fonterra has been at pains to point out the reduction is not increasing inventory and is due to a change in product mix, better sales via other channels and lower anticipated New Zealand supply”.

They believe New Zealand’s milk production will also be softer this season than the 2% fall projected by Fonterra, with the drop expected to be closer to 4%.

“We only need to cast our minds back to early 2015 when drought and less production was mooted to see the subsequent impact on prices”, they say.

Furthermore, ANZ economists say NZX future prices are pointing to aggressive price increases.  

They point out there is also “a lot of chatter about increased buying from China via other sales channels – and at price premiums well above GDT levels”.

However they remain cautious on the extent of the likely rebound.

“While premiums via other channels should support GDT prices, it remains to be seen how much demand is being satisfied via the other sale channels and to what extent this reduces buyers’ activity via GDT.

“There needs to be more concrete evidence of increased Chinese demand, lower New Zealand supply and reduced offshore inventories, which are still being reported as high.”

Dimming the glimmer of light at the end of the tunnel a little, ASB economists also add, “a risk is that the Chinese currency devaluations and associated market uncertainty over the past week spills over to dairy markets, and puts a spanner in the works of the long-awaited lift in dairy auction prices”.

ANZ economists say that from a dairy farmer's perspective, prices need to improve substantially to even hit Fonterra’s latest $3.85/kg MS milk price forecast, let alone restore profitability.

“It depends on the timing and extent of recovery, but prices need to get back into the US$2,000-$2,200 range [the average WMP price is currently US$1,590 per tonne] as soon as possible to achieve it.

“And even at this level it means most businesses will still make a loss. International prices would need to go well north of US$2,500/t, and sooner rather than later, to even begin to restore profitability.

“This seems unlikely, with most major international dairy processors pushing their expectations for a substantial recovery above these levels back into mid-2016, which will influence the 2016/17 outlook more than 2015/16.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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28 Comments

Given that it has been extensively reported that Fonterra was going to substantially cut the WMP volume on offer it would be pretty incredible if the price didn't bounce!

Fonterra is a small part of the market but my impression is the "unsustainable price" message is getting through, albeit somewhat foreign thinking to those affected. Question is, repurpose to what - at least land is easy to re-purpose compared to specialist pipework, concrete and machines.

Interesting, but if the demand is not there it's hard to see much of a long term solution. China has a problem, average wages are very low, consumption is not growing fast enough to help soak up some production, exports are down, a lot of stock piled commodities.
What if Fonterra sent a letter to every farmer in the country and told them to cut production by %20?
http://www.zerohedge.com/news/2015-08-16/asian-currency-crisis-continues...

"average wages are very low". yes....

and now almost all costs were very low ...until recently.... I wonder what is causing the problem (it's the spending doesn't go as far, causing economic regression)

China has a problem <- understatement of the day.

If the demand is not there... first realise that the demand _really_ isn't there.

that's the step some of these folks have been getting wrong. they say, price is dropping we'll just increase production to make sure the budget will reach (yes, that was actual advice given in farming magazines) - somehow that doesn't work when demand isn't actually there.

They can't actually write that letter.
that would be a quota system ... exactly what just got taken off the rest of the world.
And what happens is people find that they can on-sell their quota to other (larger) suppliers set for bulk making the quota actually more profitable than making the product !!

they can _ask_. Or they can run price information to suppliers, and then have suppliers mitigate their own businesses to suit the market....

Nz's _biggest_ asset was the honest link between suppliers and co-op, so the pairing worked interdependently , not dominated by one side or other, and not co-dependent. Good quality feedback, meant good on farm decisions. ...not more...more...moreee... oops...

Fonterra's role in setting dairy prices is shrinking fast: http://www.bbc.com/news/uk-32136218

'ANZ economists say...(pray?) prices have bottomed, and a turning point is coming.'
The turning point was sometime ago...this is not going to be a good year for ANZ tea-leaf readers

Well yeah they do say that just about every month, but hey can't blame em for trying, ha ha.

It's still a one note song, China, China, China. I'll explain it this way, if you put all your savings into speculative assets that have no cashflow, you wont have any spending monies! Duhn Duhn Dah! That is the proven road directly to the poor house, guess what the brilliant Chinese have been doing with their savings.....

They point out there is also “a lot of chatter about increased buying from China via other sales channels – and at price premiums well above GDT levels”.

Can anyone explain to me the logic behind paying price premiums via other sales channels?

It's not called Chinese Whispers for nothing ;)

It's a nice thing to claim...but you bet the farm on it ;)

Its believed that WMP importers to China warehoused inventory, they where building inventory as prices rised, they have been selling down inventory in falling market. Same has occurred across other commodities, but WMP has a shorter shelf life then copper, so the impact has been sharp.

Now all they have left is an empty warehouse and unpayable debts.

If I was a potential significant bidder at this coming auction I'd either (1) Not turn up, and let the reduced volume find whatever other demand there was, or (2) Buy a whole heap at this auction, and then not turn up to the next 2 or 3 !
Trends rarely head in one direction unchallenged, and a Bottom/Top is often only obvious looking back....

Really good news for farmers if gdt raises tomorrow I know its still early and it needs more lifts to receive current milk price but positive news is what our farmers need and not people knocking them. They are a tough bunch of people and I kid you not nz need people like these or you wont be able to drink your fancy coffee drinks, cause it will effect you too, if you think tourism is going to save this country its time to leave.

I think that offering a commodity for sale by auction in a buyers market is a poor idea - the potential buyers can just stand by and watch prices tumble further.

It's a good way to sell in a sellers market when there is competition to buy.

The whole kit and caboodle of auction selling should be folded up and put away until there is real demand again.

(Real estate agents sorted that out for houses a long time ago.)

The fact is that they don't know if prices will go up or down. It is no different to picking any market, such as the NZ dollar, gold prices etc. They can only make an educated guess. You also find that often 50% of the experts will say one thing, and 50% will say the opposite. My educated guess is it drop slightly again, based on what I have read of the market.

But why doesn't Fonterra just pay a uniform price throughout the good and bad times. So in good times Fonterra wins and ccan invest that money, to cover the low times. That way farmers can get a steady guaranteed income. The fact is that with the volatility in the market farmers (who are often not financial experts) can make bad decisions based on the high prices they have been paid in the past. This is similar to people getting a mortgage when the rates are really low and basing what they can afford to service on that low rate, and not realizing that mortgage rates will go up at some stage, and could go up a lot more than they think they may go up at. It is a similar situation to what the farmers are experiencing in reverse.

Wishful thinking? I'm shorting 50 million NZD going into the auction because it will drop like a rock.

Dairy prices won't bottom for a while no matter how much Fonterra cuts production. Europe has abandoned its milk quota system only in April this year. Combined with the cheap Euro, this results in lots of cheap dairy on the world market. And the Russian ban on imports from the west does not help prices either...

All the best with that short - Fonterra is reducing volume on offer by 25% tonight - to put a floor under it with an artificially constrained supply - were it not for that you would be in safe territory but not by much

Govt announced tonight on the news that landcorp may have to sell some farms to pay down some debt because of the muck up with converting forestry land into large scale dairy farms. Sounds like good business, sell their good farms so they can keep the project of developing poor land for into dairy farms to produce milk no one wants. All announced by BE with a big smile on his face.

Will they sell on the 'high', or take a hiding? This is a total disgrace, Landcorp got 54 million of the Clarke/Cullen government, where has that gone? They will have to sell their low cost sheep and beef operations, who the hell with half a brain would buy a high a cost dairy farm lease on crap volcanic soils, with todays high fertilser costs.
The days of a privileged civil servant class, thinking they can play with the big boys along with commensurate salaries need to end.

http://www.stuff.co.nz/sunday-star-times/business/781975/NZs-farmer-in-c...

If it wasnt such a ballsup it would be hilarious. It was drummed into us at varsity. Irrigate at your peril. The payback was always difficult. Never irrigate porous infertile soils. A waste of time and good money. Washing your fert away and you will never wet the soil enough to make a difference. I have wondered what in the last 30 years had changed. Fert and electricity have gone through the roof. Subsidies were removed. Oh my mistake nothing physical had changed. People had just got stupider.

Greed and hubris both do some strange things to the mind Belle. China will take all the milk we can produce! Commodity prices can only go up! Double farm exports by 2050!

Hell it is 6%. Volatile lot arent they

Last GDT price for Dec 15 was $1,600 and current NZX futures price is $2,200. For Feb 16 GDT was $1,700 and current NZX futures price for Feb 16 is $2,400 so we could see some spectacular rises in GDT later on.

NZX is on very low volumes so I wouldn't be surprised if Fonterra had been buying some WMP futures themselves to push up the price and therefore hopefully force the auction participants to use that as the reference.

Either way I would not be short NZD into this