Economists see rises in Whole Milk Powder price as something to build on, but believe the July/August rise in production levels will be a crucial time

Economists see rises in Whole Milk Powder price as something to build on, but believe the July/August rise in production levels will be a crucial time

By David Hargreaves

Gains in price internationally for Whole Milk Powder overnight look sustainable, but the crucial time will be when New Zealand supply has its seasonal lift in July/August, according to ANZ economists.

The key WMP prices rose 3% to US$2252 per metric tonne at the latest GlobalDairyTrade auction, while dairy prices overall gained 2.6% - the fourth overall rise in prices in the past six auctions.

However, putting that in some perspective, the GDT Index measuring overall dairy prices is still some 7.7% lower (all comparisons done in American dollars) than at the start of this calendar year, 19.5% lower than during a temporary spike in prices that peaked in October last year, and 5.6% lower than a year ago.

The WMP prices are 2.3% down so far this calendar year, 20.3% down on the October 'spike' levels and 5.8% down on May last year's prices.

Dairy giant Fonterra confirmed this week that it will be paying an early dividend of 10c next month, part of what's eventually expected to be a full-year dividend of 40c, which, with the currently forecast milk price for the season of $3.90 per kilogram of milk solids, would give a total payout for this season of $4.30. Fonterra will be providing its first milk price forecast for next season at the end of this month. See here for the full dairy payout history. 

ANZ Agri economist Con Williams and senior FX strategist Sam Tuck Dairy said prices at the overnight GDT auction had shown broad based improvement, with only skim milk powder (SMP) prices failing to gain (-0.9%).

"The weakness in SMP returns, and substantial discount that NZ product is trading to European/US product, highlights the main challenge dairy markets face in achieving substantial prices gains over the next six months," they said.

"That is a seasonal overhang of Northern Hemisphere product. If the likes of WMP become too expensive against an alternative SMP/milkfat product mix, buyers will substitute and manufacturers will ‘flex’ their production mix.

"We suspect the likes of European manufacturers have made more WMP in recent months due to excess milk, but also because of some early anticipation of better returns during the NZ off-season.

"This is hard to substantiate at this point and recent price gains on GDT for near term delivered product suggest it’s not substantial.

"However, the WMP [price] curve is very flat at present, suggesting buyers have been in no great rush to pay a premium to hedge future requirements.

"So while the price gains for WMP witnessed at recent auctions look sustainable, it also suggests the price action during the seasonal lift in NZ supply in July/August will be crucial in determining the 2016/17 outlook (just like last year).

"Until then, farmers should budget conservatively and only use a milk price around mid-$4/kg MS," Williams and Tuck said.

AgriHQ dairy analyst Susan Kilsby said the lift in WMP prices on GDT was supported by the low volumes of WMP currently on offer.

"The volume of WMP which Fonterra made available for sale on GDT was the lowest volume it has offered to the market in more than three years."

Fonterra expects to collect a total of 1,588 million kgMS in the 2015-16 season for which milk collections conclude at the end of this month. This is 3% less milk than collected the previous season.

“Despite the reduced milk flows Fonterra has still been selling product at a similar rate to last season which has resulted in a reduction in stock levels” Kilsby said.

In a business update released to the market earlier this week Fonterra revealed that its closing inventory as at 30 April 2016 was 11% lower than the same period last year as a result of strong sales performance with contracted rates similar to the same time last year.

“The GDT result last night was positive with the market now heading in the right direction, but the result was off low volumes. Hopefully the market can sustain this positive direction as offer volumes start to increase in the coming months,” Kilsby said.

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'Economists see...?' Really, DH? The ability of economists to see what's round the corner has been all but utterly discredited. Economists find a narrow, stable data set - a seemingly secure beginning point - and extrapolate their predictions from that, as if the same narrow data set would continue in time unaffected by anything extraneous to it. Rather as our government has set its social housing policy on a data set of 450 homeless nationwide, with no reference to exploding residential housing prices, immigration, social and family breakdown, etc.

Look around. We know that events in time, in global geography, in geo-politics and in magnitude, are compressing into ever closer, ever faster, ever more unstable and unpredictable outcomes. In this increasingly chaotic, increasingly unstable world, active prediction has narrowed to the supercomputers operated by major investment banks, and these deal in milliseconds.

This is a world in which so-called sustainability is a fiction built imaginatively over a series of known and unknown discontinuities and instabilities. Prosperity in farming, as in all business sectors, as far ahead as anyone can see, depends not on what economists assert, but on the urgent recovery of basic human values - in contexts such as scale, sound environmental husbandry, resilient technologies, product integrity and authenticity.

When the dairy industry learns these lessons of value it will have a future - not one that is necessarily continually sustainable, but one capable of intelligent planning and management. Not one based on prediction, environmental exploitation and product volume, but on widely-informed response to, and management of, the facts of humanity here and now.

An excellent comment, composed while I was composing mine.

Speaking of mans' inhumanity to man, look westward..

Hard to tell which is weirder, Barnaby Joyce wanting to increase the price of an oversupplied commodity, or investors suing themselves to make lawyers richer. Call it a tie, agri-socialism meets ambulance chasers via Murray Goulburn

So many zingers it's worth read in full.

The brazen effrontery is sobering.

The way commodity supply and demand generally get back into balance after supply overshoots is that production falls. It's what's happening now as marginal coal and iron ore mines close around the world. And it's happening with dairy, too. It is a terrible, sometimes even tragic, thing to be the marginal producer at such times.

Examples are lighting up press channels everywhere - just a different underlying price bloated asset.

Shopping pall trashes NYC commercial real estate"

demand always equals supply... at a price.

It is definitely a case of 'make hay while the sun shines' because the NZ dairy sector is inherently unsustainable, and it is just a matter of time before it goes into terminal decline,

Factors that will bring about the demise of NZ dairying include:

1. Unsustainable energy use -especially coal and imported liquid fuels.

2. Unsustanable fertiliser use -especially imported phosphate.

3. Increasing climate disruption that will lead to longer periods of severe drought and episodes of more intense torrential rain.

4. Expansion of dairying in regions of the world close to centres of demand where there is currently little or none at the moment.

Add to that list political factors, such as the apparent determination of the US to prevent China and Russia gaining ascendency and the possibility of sanctions or actual military conflict between the US and China-Russia and it is clear we live in the most uncertain times ever.

Well dairy farming has been a key export sector for over 100 years so tradiional farming practices seem to be absolutely sustainable in the very long term.

I think you should narrow your comments so that they referr only to those large scale farms that use heavy levels of supplements. The trend may well be back to traditional farming practices and beyond to organic dairying.


Hes a tree hugger that would rather us live without any modern conveniences like power or transport. Its sounds rose coloured glasses until you think about it for 2 seconds.

I'm not sure what you mean by "Unsustainable energy use." Coal and oil are the cheapest source of energy and will continue to be for longer than the rest of my life-time and those of my grand children. If you are implying the emission of carbon dioxide and its alleged impact on climate it should be recognised that there is no empirical evidence which relates it to atmospheric temperature. The only "evidence" claimed is from computer models which is not evidence at all, which are only as good as the assumptions they make and, thus far, have proved singularly inaccurate. The 5th Assessment Report of the IPCC states that there is little or no evidence supporting your third contention that "climate disruption will lead to longer periods of severe drought and episodes of more intense torrential rain." Not being an agricultural scientist, I cannot comment on fertiliser use. Increased production in North America and the EU supports your fourth contention and is the most immediate threat to market prices. I'm not sure that it is necessarily a longer-term problem.

"Dairy giant Fonterra confirmed this week that it will be paying an early dividend of 10c next month, part of what's eventually expected to be a full-year dividend of 40c, which, with the currently forecast milk price for the season of $3.90 per kilogram of milk solids, would give a total payout for this season of $4.30."
Why do common tatters persist with the anachronism of adding the dividend payout to the milk price. The dividend is totally reliant on the ownership of shares and the ownership of shares is no longer reliant on the supply of kgs of milk-solids. As well, with the addition of sharemilkers and non shareholding farmers into the mix there are a large number who are reliant only on the milkprice figure. I can understand Fonterra wanting to talk the price up but why do the sheep simply follow the lead.

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