GDT dairy auction looks set for a 'scramble' to buy - ANZ

ANZ rural economist Con Williams.

This Wednesday's GlobalDairyTrade (GDT) auction looks set for another scramble to secure product, creating further upward pressure for dairy prices, ANZ rural economist Con Williams said.

Milk supply appears to be tightening more quickly than first thought, prompting more buyers into action, Williams said in a commentary.

New Zealand has had a slow start to the new season, and with carry-over inventories from last season tight, this has forced more buyers on to the GDT platform to secure product, he said.

European production was down 1.5 per cent, year on year, in June, with notable softness across the three largest producing countries - Germany, France and the UK, which account for 47 per cent of annual European production.

Williams said there was a suggestion that milk supply had tightened in China due to dry conditions across the northwest of the country where the majority of its milk is produced.

In terms of price expectations, NZX futures are pointing to an 11 per cent lift in the GDT price index, and a 9 per cent increase for whole milk powder to US$2938/tonne.

For whole milk powder, the market appears nervous about pushing prices above the US$3000/tonne mark at present.

"For this to occur there would need to be continued tightness in milk supply from New Zealand, Europe and China," Williams said.

"Much will depend on the weather over coming months and how quickly the pass-through of higher international prices to farmgate occurs."

ANZ continues to hold a high-$4/kg milk price forecast for 2016/17, with upside risk if recent price gains can be held on to in October/November when the Chinese free-trade window closes.

A strong sale this week will build on an 18.9 per cent gain for whole milk powder at the previous GDT auction on August 17 and a 9.9 per cent improvement on the one before that.

Low farmgate prices over the past two seasons have resulted in burgeoning farm debt and a huge cow cull and has severely curtailed the use of supplementary feed.

Fonterra last month raised its farmgate milk price forecast to $4.75/kg of milksolids, from $4.25, while the second biggest co-op, Westland Milk, raised its payout to $4.55-$4.95/kg.

Fonterra's milk price came to $3.90/kg in 2015-16, $4.40 in 2014-15, and a record of $8.40 in 2013-14. Dairy NZ's estimate of break even is $5.05 a kg.