Dry conditions through much of summer point to another gain for dairy prices on GDT

Dry weather hit Fonterra's production in December. Photo/File

Dry weather during much of summer is likely to make its presence felt at this Wednesday's GlobalDairyTrade auction, with diminished milk supply expected to push prices higher.

Fonterra has said that it expects production to fall by 3 per cent over this season, compared with last, due to the extreme weather.

Some analysts doubt whether it will come to that, but prices are nevertheless expected to improve and build on the last auction, which saw key whole milk powder prices rally by 5.1 per cent to US$3010 a tonne.

Futures market pricing, which over the last few months has tended to overshoot what actually happens at the auction, last week suggested whole milk powder prices could rally by as much as 8 per cent come Wednesday.

"It certainly looks like we will have a good result this week," Karl Arns, dairy futures broker at OM Financial, said.

"Futures have been terrible predictor of late," Arns said. "But that said, in recent events the direction has been pretty well right, so I would be very surprised if it was down," he said.

Arns said skim milk powder, anhydrous milk fat and butter looked to be well supported "so the whole complex is looking good".

ASB rural economist Nathan Penny has adjusted his production forecast for this year to a 1 per cent gain, down from his previous forecast of a 3 per cent gain, but still more optimistic than Fonterra's forecast of a 3 per cent decline.

He agreed that firm prices at this week's auction looked likely.

"Markets are adjusting to the prospect of less milk than they thought would be around," he said. "We would not be surprised to see another lift."

Fonterra has been reducing the amount of product it puts on the GDT platform.

Last week, the co-op adjusted forecast offer quantity over the next 12 months, this time from 615,004 tonnes to 614,704 tonnes.

The change reflected a decrease of 2750 tonnes for skim milk powder (SMP) and 1000 tonnes for butter, and an increase of 3450 tonnes for anhydrous milk fat (AMF).

"The increase in AMF reflects strong market demand, while the reduction in SMP and butter volumes are driven by the impact of dry weather on milk flows," it said.

Fonterra said it would continue to keep a close eye on the effect of weather conditions on milk collections.

In December, Fonterra's New Zealand milk collections fell by 6 per cent compared with December in the previous year.

In its latest Global Update, Fonterra said dry weather in early December significantly affected soil moisture and pasture quality across the country.

"While the recent wet conditions have helped in some regions, it is unlikely to be enough to bring production back to previously anticipated levels," it said.

Fonterra's farmgate milk price for the season remains at $6.40 per kg.