Prices of dairy products experience largest fall since January; 'cooling off period' seen

By David Hargreaves

Dairy prices had their biggest overall drop since January, as the recent strong rally came to a halt in the overnight GlobalDairyTrade auction.

Skim butter milk powder was the only product category to rise in price as the GDT Index dropped 3% - though to put it into some perspective, that just brought average prices back to where they were in mid-August.

The key whole milk powder (WMP) price fell 3.8% to US$2681 per metric tonne. Recent auctions have seen the longer-dated contracts tend to do better, but last night the longest dated one for delivery in April next year fell by 7.2%.

ANZ agri economist Con Williams said the overnight auction result disappointed, but wasn’t surprising with buyers recently becoming more cautious.

"Increasingly it looks like there will be a cooling off period as the Chinese FTA buying window closes and the market awaits further information on supply dynamics," he said.

But despite this, he said ANZ economists continued to believe that the recent rally in prices "has more durability" than seen in recent years.

"This is due to milk supply actually contracting in all major export markets bar the US, very tight New Zealand inventory levels pushing demand on to GDT and recent demand at higher prices being more broad based than China alone."

Giant dairy co-operative Fonterra recently raised its forecast milk price for farmers in the current season to $5.25 per kilogram of milk solids, which if achieved would be the highest in three years - though still below the around $6 regarded as sustainable.

Williams said ANZ economists continued to forecast a "high-$/4kg MS milk price view" for the current season.

"This is obviously below Fonterra ($5.25/kg MS), but in line with other dairy processors current forecasts ($4.60-$5.00/kg MS).

"After last night’s auction current market indicators have the milk price around the low-mid $5/kg MS mark.

"If recent prices, which look more durable than this time last year, can hold steady into year end this should be easily achievable. But until then we prefer to take a cautious approach."

ASB economists have long since taken the most 'bullish' view of prospects for this season among major bank economists and were forecasting a milk price of $6 when some others were suggesting a sub-$4 price was possible as recently as July.

In again re-affirming that $6 forecast today ASB senior rural economist Nathan Penny said the ASB economists were expecting dairy prices to "track largely sideways over coming auctions" as markets wait for further confirmation of weakening NZ production.

"In our view, we expect production to continue to weaken and thus for prices to lift again later in the season.

"On that basis, we look to NZ spring data that supports or challenges our view that global production will weaken further over 2016.

"Data so far are consistent with our view. NZ production for August was 3% lower than August 2015; with production for the season to date 2.4% lower than over the same period last season. Meanwhile, July EU production fell 1.3% compared to July 2015."

On September 21 Fonterra increased its 2016/17 forecast Farmgate Milk Price by 50 cents to $5.25 per kgMS on the back of the recent global price gains. When combined with the forecast earnings per share range for the 2017 financial year of 50c to 60c, the total payout available to farmers in the current season is forecast to be $5.75 to $5.85 before retentions.

See here for the full dairy payout history.