Futures point to further dairy auction falls

The price for New Zealand's key dairy export, whole milk powder, is set to decline further at tonight's GlobalDairyTrade auction as dairy companies head into the new season and ramp up production.

The current July whole milk powder futures contract last traded on the NZX at US$2,200 a tonne, 3.7 per cent below the winning price of US$2,285/tonne at the last GDT on June 16. Traders also pulled back their expectations for longer-dated contracts with the November futures contract priced at US$2,310/tonne, down 1.9 per cent compared to the last auction.

Fonterra Cooperative Group, which accounts for the bulk of whole milk powder sold on the GDT, will increase its volume on the platform to 15,750 tonnes, from 10,000 tonnes at the last auction as production increases in the lead-up to peak supply in October.

Weaker dairy prices are weighing on New Zealand's economy, cited as a reason for decade-low rural confidence levels, weaker business confidence and are firmly on the radar of the Reserve Bank which has begun cutting interest rates to bolster slowing growth. Dairy prices have remained lower for longer amid higher global supplies in New Zealand, Europe and the US and weak demand from key markets in China and Russia.

"The expectations that prices will rise seems to be getting continually delayed," said AgriHQ senior dairy analyst Susan Kilsby. "It's still relatively pessimistic at the moment. Prices at the current levels are certainly not sustainable."

Reserve Bank governor Graeme Wheeler has flagged a weak dairy sector as one of three key risks to the nation's financial stability, saying about a quarter of farmers were operating in negative cash flow this season and were relying on short-term loans to cover their working capital. If prices didn't recover, that would put stress on parts of the sector, which in turn could taint banks' loan books.

Whole milk powder futures were previously trading at a premium to GDT, signalling expectations for a rebound in pricing from low levels, but were now trading at a discount, said OMF financial markets director Nigel Brunel, who expects prices to fall between 5 and 10 per cent at tonight's auction.

"Price increases are more likely to come from a supply correction rather than demand correction at this stage just because the amount of cheap capital in the world has seen a whole lot of additional supply come on line," said First NZ Capital head of derivatives Mike McIntyre.

Still, AgriHQ's Kilsby said there appeared to be little on the horizon to stimulate prices in the short term.

"They will increase again at some point but at the moment the buyers are reasonably well covered so there is nothing to stimulate demand in the short term," she said. "The long-term outlook for the industry is still positive but it is going to take the bulk of the current 2015/16 season to recover."