Glimpse of light for dairy trade

Commentators were not reading much into Fonterra’s latest update, which showed milk collections were down 10 per cent in June. Picture / Bloomberg

Whole milk powder prices end four-sale losing streak but still well short of the mark.

The latest GlobalDairyTrade auction offered few clues as to the likely direction of dairy prices in the season ahead, although a rise in whole milk powder prices offered some cause for optimism.

Whole milk powder prices - which are key to formulating Fonterra's farmgate milk price - rose by 1.9 per cent to US$2079 a tonne, ending a four-sale losing streak. However, prices are still well short of the US$3000 a tonne required to put loss-making dairy farmers back into the black.

The price of another key product, skim milk powder, dropped by 1.1 per cent to US$1927 a tonne and the GDT price index was unchanged from the last sale early this month.

ASB Bank economist Nathan Penny said Britain's exit from the European Union had proven to be a "temporary distraction" for the commodities markets, with dairy prices largely unchanged in the two auctions since the vote.

"Indeed over this season, our view is that tightening global dairy supply will be the key market driver," Penny said. "Accordingly, tighter dairy supply should contribute to higher global prices."

Commentators were not reading much into Fonterra's latest update, which showed milk collections were down 10 per cent in June - which is a typically light month at the start of the season.

Fonterra's current milk price for 2016/17 currently sits at $4.25 a kg of milksolids - $1 a kg below what is considered to be break-even for most farmers. Penny, with his forecast of $6 a kg, is at the optimistic end of most forecasts.

"D-day is approaching, however, for our 2016/17 milk price forecast," he said.

"We stick with our 2016/17 milk price forecast [of] $6.00/kg. However, we note that to maintain our forecast, prices will need to rise materially over coming months, particularly as peak auction volumes are on offer for the season over the coming three months or so," he said.

ANZ rural economist Con Williams, looking out through longer-dated contract periods, said the whole milk price curve had regained a small upward slope, which was a positive sign.

Fonterra is expected to provide an update to its opening milk price forecast in August and the last two major updates from Fonterra have seen spot market pricing used.

"If this approach continues, it would imply a downgrade, with international prices having moved lower since May and the currency higher - a bad combination," Williams said. "While this will continue to weigh on sentiment, any downgrade is unlikely to affect 2016/17 cash flow projections materially though."

Westpac senior economist Anne Boniface said the auction supported the bank's view that prices were likely to remain near current levels for much of 2016, before gradually improving late in the year and into next year.

"We don't anticipate a quick turnaround in fortunes in the dairy sector," Boniface said.

"While we continue to forecast a $4.60 milk price payout for the current season, we are conscious of downside risks emerging to our forecast, particularly from the strong NZ dollar."

Dairy auction

• Whole milk powder prices up 1.9% to US$2079 a tonne.

• Skim milk powder down 1.1% to US$1927 a tonne.

• GDT price index unchanged.