Another disappointing global dairy auction outcome keeps the pressure on farmers; ANZ economist says dairy prices remain 'precariously placed'

Another disappointing global dairy auction outcome keeps the pressure on farmers; ANZ economist says dairy prices remain 'precariously placed'

By David Hargreaves

ANZ agri economist Con Williams says global dairy prices remain "precariously placed", meaning that Fonterra's current milk price forecast for farmers of $4.25 per kilogram of milk solids "looks optimistic at this stage".

His comments followed a disappointing outcome overnight in the latest GlobalDairyTrade auction, in which prices as measured by the GDT Index dropped 0.4%.

The key Wholemik Powder average price, at US$2062 per metric tonne, was down 2.6% on the US$2118 recorded at the previous auction. WMP prices have fallen 8.4% across the last three auctions and are now some 10.5% lower in American dollar terms than they were in December.

However, the strength of the kiwi dollar this year has also gone against farmers. In NZ dollar terms the WMP prices are actually over 15% lower than at the end of last year. 

ANZ's Williams said, that while the "headline" dairy auction result held up in the latest auction, this masked "troubling softness" elsewhere.

He pointed to the fact that short-term contracts, those for product to be delivered next month, were all up substantially, including a 15% rise for the August contract WMP.

Williams said this kind of near-term price support would suggest demand from a small number of buyers for short-term requirements.

"It was a different story further out the curve where the likes of WMP prices dropped 4-6% across the other contract periods.

"All-up prices remain precariously placed and combined with NZD resilience this means Fonterra’s starting milk price forecast in May of $4.25/kg MS looks optimistic at this stage. If recent auction prices were to persist then the milk price will see no improvement from the season that has just finished."

ASB economists have been in relative terms 'bullish' about the prospects for dairy prices this year - but even they now are seeing downside risks.

Rural economist for ASB Nathan Penny said the economists were sticking with their 2016/17 milk price forecast of $6.00/kg for now.

"However, we note that any further temporary setbacks to prices or alternatively the absence of an improvement in prices over coming months will make our forecast increasingly difficult to maintain," he said.

"...Our milk price forecast assumes dairy prices rise over 2016. So if dairy buyers continue to sit on their hands and wait for the Brexit dust to settle over coming months, achieving our milk price forecast becomes increasingly difficult with each passing dairy auction. Similarly, any further temporary dairy price setbacks will have the same effect. For now though, we stick with our 2016/17 forecast, but highlight the growing downside risks."

Fonterra made its current price forecast on May 26, at which time it also re-affirmed an expected price of just $3.90 for the recently completed season. Farmers are looking at their third consecutive season of potentially below break-even prices. See here for the full dairy payout history. 

AgriHQ dairy analyst Susan Kilsby pointed out that there had been 16,250t of WMP available at last night’s auction – which was some 56% more than at the previous auction.

"The drop in the WMP price indicates that demand is not currently strong enough to absorb the higher volumes of product being offered without some price correction occurring," she said.

"Volumes offered last night were typical levels for this time of the season. Offer volumes are forecast to continue to rise in the coming months, peaking in September."

Kilsby said global demand for milk powder remained subdued as most buyers had sufficient stocks on hand to meet their immediate requirements, "therefore have little urgency to buy right now”.

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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Whats 40 billion in dairy debt between friends. When Shanghai Pengxin , came in and grossly overpaid for the Crafer farms with offshore debt and with the full approval of this government and the banks wishing to retrieve their existing debts , every Kiwi famer simply jumped the snark .Oh the stories that will unfold over the coming 24 months , when the chinese middle class simply does not raise the dairy bid, and the front pages will show the mess and finger pointing that will undoubtedly occur.

The problem is that people want to create their own reality, its called delusion and when actual reality plays out people go in to denial or get very angry. The denial stage is currently playing out, wait for another 6 months then the anger will come

Surge in impaired assets

Parent National Australia Bank (NAB) put BNZ's gross impaired assets at $807 million at March 31, including $579 million of dairy exposures currently assessed as no loss based on security held. The $807 million figure was up up almost fourfold from just $216 million at September 30 last year, and up from $308 million a year earlier. The rise helped push assets at least 90 days past due plus impaired assets, as a percentage of gross loans, to 1.43% from 0.61% at September last year.

Diary land falling 16%PA and no real forced sales yet .....

I think national needs to reinstate all the ag scientists they sacked, and majic up a new product out of the WMP that Fonterra is flogging a dead horse with. Cant be that hard can it...?? Or would the geniuses at the board of Fonterra turn it down like A2 again....?

we need 100 x Puhoi cheese. Lots of jobs... In the regions.... artisan cheese like craft beer is the future

Am in France at the moment," how can anyone run a country with 248 different types of cheese..!" De Gaulle.

248 types of cheese sounds a great way to go. We would have a great country if we did.

Charles De Gaull also told a reporter what the secret to a long life was - with the accent it sounded like "appiness" . . . say it slowly :-)

IT Guy you do realise that Wilmar International and First Pacific ( own Puhoi via their ownership of Goodman Fielder which in turns owns Puhoi Valley Cheese. ?

I think foreign ownership of so much is just totally lost on people these days. Sad situation

True, but as a former resident of Puhoi it wasn't always that way. But Goodmanfielder would not survive without the supermarket model, and that models days are numbered. The full context and intent of ITGUY's comment is sound.

Yes anti-corporate is gaining momentum, no more fat cats that believe exploiting is the fundamental of success, no more 5 million salaries,

French food group Danone agreed to pay $12.5 billion for the shares and debt of WhiteWave, a specialist of vegetable-based dairy products, which will double its size in the United States.

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