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.
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."
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.
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.