Some long overdue cheer for dairy farmers as dairy auction prices surge to their highest levels so far this year; ASB sticks with $6 milk price pick

Some long overdue cheer for dairy farmers as dairy auction prices surge to their highest levels so far this year; ASB sticks with $6 milk price pick

By David Hargreaves

Dairy prices surged to their highest level so far this year in the overnight GlobalDairyTrade auction, providing some cautious optimism that a corner might have been turned for the struggling industry.

And long time dairy market bulls, the economists at ASB, are sticking with their bold, way-ahead-of-other-predictions, $6 per kilogram of milk solids price for farmers this year - against a current official forecast from Fonterra of just $4.25.

The overall GDT Index gained 6.6%, with an average given price of US$2435 per metric tonne - the highest level since last November - while the vitally important Whole Milk Powder price lifted 9.9% to US$2265/t - the highest since December.

One very encouraging sign in the WMP prices was that the gains were highest in the longer dated delivery contracts - suggesting stronger future demand.

'Waking up'

ASB rural economist Nathan Penny said dairy markets were "starting to wake up".

He said the ASB economics team continued to hold the view that prices this season would lift by more, and earlier, than other analysts.

"In other words, we expect dairy prices to build on this auction’s lift and continue to rise over the remainder of 2016." He re-affirmed that ASB was picking a $6 milk price for this season.

"Dairy buyers had gotten used to ample global milk supply, and had bid down prices as a result. However, that picture is changing, and it is changing fast," Penny said.

"NZ (and Australian) farmers are leading the way. For example, we estimate that the NZ dairy herd has shrunk an unprecedented 5% or 300,000 cows on top of the 3% fall last season. This heavy slaughter is irreversible and will translate into a downward correction in NZ supply.

'Supply picture has changed'

"The EU supply picture has also changed, although it remains a step behind that of its southern counterparts. For example, June UK production is down 9% on June 2015. But other producers such as the Netherlands and Ireland are hanging in there for now, despite very low milk prices. In aggregate, though, the EU milk tide has also turned.

"As a result, the dairy price question is shifting. In our view, it’s no longer a question of will prices lift this season, but rather by how much and over what period," Penny said.

ANZ agri economist Con Williams in a note titled "more of the same, please" said that more of the same would be what dairy farmers would be asking for today after the strong GDT price increases.

"Most reports are of buyers looking to lock-in future requirements at historical lows with tradable supply beginning to tighten.

Higher Chinese participation

"The other driver appears to be higher Chinese participation as larger volumes are sold during the tariff free window of November to January. This sentiment was certainly reflected in a significant steepening of the WMP [price curve].

"So has the switch been flicked? We will have to wait and see, but historically slowing global supply, which we are seeing more signs of, has been the catalyst to leaps higher in bulk ingredient prices.

"That said we are cautious given recent year developments and the way the NZD is behaving.

"More of the same will be required to achieve current milk price forecasts."

Fonterra re-affirmed

That current milk price forecast of a $4.25 per kilogram of milk solids payout for Fonterra farmers was reaffirmed by the dairy co-operative this week, and it also predicted earnings per share (and therefore a potential dividend of) up to 60c.

That could potentially make on current forecasts a payout of up to $4.85 for this season against just $4.30 in the immediately past season.

See here for the full dairy payout history. 

AgriHQ dairy analyst Susan Kilsby said the latest GDT auction showed that dairy commodity markets were "waking up" to the fact that milk production is slowing across the globe.

Europe output 'being stemmed'

“The majority of the extra milk produced in recent years has come from Europe – but output there is now being stemmed by low returns. We are still seeing growth in the US market but that is largely being taken care of by their domestic market.

”It is excellent to see such a strong lift in dairy commodity prices this early in the season. New Zealand has a large volume of dairy product to trade in the coming months so it is important that these products achieve higher prices if returns to farmers are to lift”.

Kilsby noted, however, that milk prices still remain well below the cost of production which is over $5/kgMS for the average farmer.

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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What is the EU intervention price? That will surely be the factor that limits any further upwards movement on the GDT when 350,000 tons or more becomes available on the market.

This is all based on USD prices. The gains are less so when factoring a stronger NZD. Price rises could be more of an indicator of where the USD is headed (weaker) as opposed to demand factors.

That's where forex hedging/cover by processors can be the make or break figure for farmers. It can add/subtract a not insignificant figure to milk price/payout.
edit: I agree with the sentiment of your comment.

"mokkari-makka?,"

That price, while still well short of the US$3000 a tonne required to put loss-making farmers back in the black, will nevertheless act as a confidence booster for the sector.
http://m.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11685856

Confidence follows success. Being confident does not mean success follows.
Now if making money is the indicator of success.
There is very little farm gate success.
Lot of banker confidence.

"bochi-bochi denna"

The question is how high will butter prices rise? Will we see ten dollars per pound of butter? Maybe not, but seven dollars is very likely before 2018. At the risk of being repetitive, I remember 99 cents per pound of butter not that long ago. How does globalization help us? It helps to undermine our standard of living. I refuse to eat hydrogenated vegetable oils as a substitute for butter. I refused to eat it when it was introduced as the new 'wonderful' aid for combating coronary disease, and after it was proven more damaging than butter the only reason to consume it is because one can't afford butter. Mind you, margarine prices have trailed butter's rise.

Globalisation isn't designed to help you - its designed to access the cheapest labour possible and highest consumption possible .... and ultimately extract as many resources as possible before the Ponzi scheme collapses.

But, but, but, I've been told inflation is a good thing.

I gave margarine the taste test and it failed. Turns out my taste buds can tell what is good for me. Globalisation helps do more of what you are good at. If we didn't export we wouldn't produce much butter, milk etc. provided we can produce it very well, we become richer as a result. If we are not competitive then we are worse off.

One swallow a summer does not make #remainingcautious

Nathan Penny your talk is cheap - probably went to a John Key seminar on public speaking and aiming to take over from Nathan Guy as Minister for Primary Industry