Wholemilk is down 4.4 per cent at first GDT auction of the year despite volume reductions, and outlook is weak

Prices fell unexpectedly at the year's first GlobalDairyTrade (GDT) auction and the outlook for later on is weak.

The lower prices yesterday suggested the market was not concerned about the possibility that the current El Nino weather pattern could further inhibit production in New Zealand -- the world's biggest dairy exporter.

Fonterra's New Zealand milk collection forecast for the 2015/16 season is for a 6 per cent fall, but production in Europe and the United States continues to grow, albeit at a reduced pace, which means the world's supply/demand imbalance will be around for some time yet.

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At the auction, the GDT price index fell 1.6 per cent from the previous auction three weeks ago. Wholemilk powder prices -- which make about about 75 per cent of Fonterra's farmgate milk price calculation -- fell by 4.4 per cent to US$2210 ($3321) a tonne compared with futures market pricing, which suggested a 6 per cent gain was likely. The declines in wholemilk prices came despite volume reductions by Fonterra in each of the past four auctions.

But the worrying aspect for farmers was the pricing for contracts for shipment further out along the curve, with regular wholemilk powder for July shipment trading at just US$2260 a tonne.

Fonterra's current farmgate forecast of $4.60 a kg of milksolids -- below the estimated break-even point of $5.40 a kg -- rests on wholemilk powder hitting US$3000 a tonne in the first half of this year.

AgriHQ analyst Nick Handley said the decline caught the futures market off guard.

Typically when our production slows, it's enough to see global prices rise.

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"This season we are seeing a further drop in wholemilk price fall clouds Fonterra's forecast production fall significantly -- and with the El Nino effect it could fall further -- but global markets are not responding, which highlights how much extra milk is coming out of the European Union and the US," Handley said.

El Nino risk was always likely to kick in towards the latter part of the season, but January had already seen good rainfall in many parts of the country, Handley said, so the risk was that production might not "fall off a cliff" as a result of El Nino.

ASB Bank said the downside risk to Fonterra's milk $4.60 a kg price forecast was increasing.

The latest forecast, issued last month, reflected Fonterra's view that international prices would continue to improve in the first half of this year.

"That may still happen, but the signals from the overnight auction and current futures prices highlight the risk of only very modest gains over the coming months," ASB said.

Furthermore, the greatest falls in wholemilk prices were in the season-end contracts, where prices declined over 6 per cent from the December 15 auction.

"This suggests participants do not have supply concerns over the back half of the season," the bank said.

Chicago-based HighGround Dairy said the lack of enthusiasm to begin 2016 and the flattening of the forward curve in most markets continued to send a bearish signal to the industry.

Dairy is in good company -- crude oil, natural gas, corn, soybean meal, wheat, coffee, dairy and many others are at multi-year lows.

"For dairy, until global milk supplies begin contracting and stocks are reduced to more manageable levels, do not expect prices to have a meaningful recovery any time soon," HighGround said.

Dairy direction

• GDT price index falls 1.6 per cent after two small gains last month.
• Wholemilk powder prices drop by 4.4 per cent.
• Weakness clouds Fonterra's $4.60 kg milk price forecast.