Futures hint at bounce-back for dairy prices

Fonterra is expected to review its $4.60 a kg farmgate price forecast next month. Photo / Christine Cornege

Market showing signs of improvement but outlook ‘can change on dime’, says expert.

Dairy prices look to have finally bottomed out and tentative signs have emerged in the futures market that they may soon improve.

At last week's GlobalDairyTrade auction, prices fell by 7.9 per cent - the third decline in row - but futures pricing since then suggests the market may have turned.

Whole milk powder prices fell by 11 per cent to US$2148 a tonne at the last sale. Fonterra's $4.60 a kg farmgate forecast rests on whole milk powder prices improving to US$3000 a tonne by the first half of 2016. Fonterra is expected to review its forecast early next month.

"We feel prices are now at the bottom of a fair-value range for current market conditions," said ANZ rural economist Con Williams.

"This is especially the case when you compare New Zealand prices to those achieved by US and Europe competitors," Williams said.

"These positive dynamics are being reflected in the NZX futures prices, which have bounced solidly post the latest GDT auction and point to an uplift at the next auction."

ANZ continues to forecast a $4.25 to $4.50 farmgate milk price, but Fonterra now faces improved prospects for its dividend as its financial performance picks up.

The 20 per cent fall in the Real Estate Institute of New Zealand's dairy land index over the past few months "does look alarming" but Williams was wary of reading too much into the drop given the market can be illiquid at this time of the year.

"Undoubtedly, stress and pressures are intense and the sector remains a key area of downside risk for the economy more broadly," he said.

Recent price falls are a reminder of what is now a key feature of the dairy market - volatility.

Nigel Brunel, director financial markets at OM Financial - said the futures market was building up a premium compared with prices achieved at last week's auction.

The December whole milk powder futures contract was at a US$100 premium to the last GDT outcome, and the January contract was at a $150 premium," Brunel said.

"It keeps on surprising from a volatility perspective."

While the next GDT auction is a week way, current futures pricing suggested a bounce was on the way.

"But a week is a long time in the dairy market," he said. "The odds are on for a 5 to 10 per cent gain, but that can change on a dime."