ASB economists see butter prices in particular heading higher this year

ASB economists see butter prices in particular heading higher this year

ASB economists are now seeing "upside risk" to their forecast milk price for farmers this year of $6.75 per kilogram of milk solids - which is currently the same as Fonterra's official forecast price.

ASB senior rural economist Nathan Penny - who last season went far out on a limb to predict a higher milk price, correctly as it turned out - sees a strong dairy price outlook, "particularly for milk fats".

At the overnight GlobalDairyTrade auction overall prices dipped by 1.6%, though the key Whole Milk Powder price gained 1.3%, remaining comfortably over the US$3,000 per metric tonne level at US$3,155.

Milk fat prices - particularly butter - have been red-hot, but eased back overnight, with both butter and Anhydrous Milk Fat (AMF) falling 4.9%.

"...It’s not altogether surprising that milk fat prices took a breather, given the price explosion over recent months," Penny said.

"Butter prices, for example, have surged over 35% this year, while AMF prices have lifted a more modest, but still robust, 18%. Moreover, both butter and AMF have set multiple auction record highs over 2017.

"However, we suspect that the slowdown in milk fat prices may be temporary.

"Demand continues to surge and inventories are now very tight. Indeed as supply struggles to keep up, we expect that any further lift in milk fat prices will lift dairy prices more generally. Accordingly, such a lift would break WMP prices out of their holding pattern of recent months."

Penny said he believed In our view, butter’s fall overnight was akin to a motor racing pit stop.

"Pull over, refuel, change tyres and then go again.

"In other words, we think that butter and milk fat prices can go higher yet. If we are right, a further surge in butter prices is likely to lift all dairy prices more generally. In turn, such a general price lift would also lift our milk price forecast above $6.75/kg.

"Of course time will tell, but in our view butter’s race higher is still worth watching."

Fonterra will be reasonably comfortable with the latest results at what was the first GDT auction since the co-operative lifted its forecast milk price for farmers in the current season to $6.75 per kilogram of milk solids and forecast an earnings range of 45c-55c per share this year.

Overall dairy prices are actually down just a little so far this year - but by less than 1%, and this does follow a very strong rally in the closing months of 2016.

Fonterra chairman John Wilson said last week that the co-operative's revised forecast milk price reflected the ongoing "rebalancing of supply and demand in global dairy markets". 

See here for the full dairy payout history. 

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ASB economists are just PR spin doctors towing the company line,insiders . High prices will create more production and there is plenty of latent production capacity in world dairy herds. The EU still has huge stockpiles, weakening US $ making the USA a very competitive exporter, talked to a banker expecting another %4 fall by the end of next week