Milk supply dip should lift prices

Fonterra said last week that it expected production this season to be 3.3 per cent down on the previous season's. Photo / Wairarapa Times-Age

Economists expect constraints on production will mean a bullish outlook for this week's global dairy auction

Reduced dairy production is expected to translate into higher prices at Wednesday's GlobalDairyTrade auction - the first since Fonterra's announcement that dry weather would punch a hole in milk volume this season.

Fonterra said last week that it expected production this season to be 3.3 per cent down on the previous season's, and economists said the prospects of tighter supply should be good for prices.

ANZ Bank rural economist Con Williams said lower output from Fonterra - the world's largest diversified milk-processing company - would have significant ramifications for the market.

He expected the effects of constrained supply to show through quite quickly, which would test sentiment on the buy side.

"Fonterra's announcement probably leaves the market quite empty going in to next season, and there has also been quite a big drop in the New Zealand dollar, which creates better prospects for the 2015/16 season's opening price," Williams said.

He expected to see a "reasonable price uplift" at this week's auction, which would give Fonterra some comfort about its $4.70 a kg farmgate milk price forecast for the season.

ASB Bank rural economist Nathan Penny said Fonterra's announcement was likely to be bullish for dairy prices.

"By way of comparison, a similar reversal in milk production growth in the second half of the 2013 season saw auction prices climb over 50 per cent in the space of three months," he said.

But Penny said he was not convinced that production would fall as hard as Fonterra's forecast.

"Anecdotes from the regions that we have received to date are that by in large farmers are managing the dry weather."

Hayley Moynihan, Rabobank's director of dairy research, said prices looked to have bottomed and reduced supply from Fonterra would help the firming trend, but she did not expect a big price spike.

"We are generally seeing a bottoming out in prices anyway, so it will hope to continue that trend, but I don't think it's going to spark a huge lift in pricing," she said.

Around this time of year, buyers were looking to European suppliers in the northern spring, and there was more product coming on to the market from the United States thanks to low feed prices.

"It's more supportive for wholemilk prices, because New Zealand is the world's biggest producer, but across the product categories I think there is still plenty of supply from other sources," she said.

In its latest commodities outlook, Rabobank said dairy commodity prices had fallen below sustainable levels in the medium term but lower supply was expected to underpin a modest recovery in the second half of this year.