'Hard to be bullish' on dairy prices

ANZ Bank rural economist Con Williams said the market was struggling to digest more product at the start of the 2015/6 season. Photo / NZME.

NZX dairy futures pricing continues to point to more weakness in the whole milk powder market, following on from the sharp decline at last week's GlobalDairyTrade auction.

Last week, the GDT price index dropped by 5.9 per cent while whole milk powder prices - responsible for about 75 per cent of Fonterra's farmgate milk price - fell by 10.8 per cent to US$2054 ($3074) a tonne.

On Friday, the July NZX futures contract traded at US$1950 - a US$50 discount to Contract 2 (C2) for September 15 shipment at last week's GDT auction. The August futures contract was down US$45 to US$1930, a US$50 discount to the price paid for Contract 3 (October 15 shipment) at last week's GDT auction.

Nigel Brunel, director of financial markets at OM Financial, said futures selling had seen the premium of futures pricing over GDT market prices melt away. "There is a great weight of selling," Brunel said.

"It's hard to be bullish or upbeat at all," he said, adding a Fonterra farmgate milk price of sub $4 a kg looked likely if weakness in the futures market persisted. Its current forecast is for $5.25 per kg for 2015/6.

ANZ Bank rural economist Con Williams said the market was struggling to digest more product at the start of the 2015/6 season, which peaks around September/October.

"And it looks like it will continue to struggle over the shorter term."

The volume of product being offered on at GDT auction is expected to rise over the next two months.

"It could get quite nasty because the major buyers do not appear to be there," Williams said.

"There are reports that some of those secondary markets - which have bought quite strongly over recent months - are not there as well."

On the plus side, there were signs production was starting to tail off in response to lower world milk prices.

"I think the dynamics are in place for lower output in New Zealand for 2015/16 but that won't come through until early summer," he said.

Backing the case for lower production is higher cow cull. The cull so far this year is close to 1 million, up about 20 per cent since this time last year, Meat Board data shows.