Strong lift in dairy prices tipped for this week

Production cuts are pointing towards a decent hike in world dairy prices later this week. Photo / Sarah Ivey

This week's GlobalDairyTrade auction is shaping up to be another strong one, following on from double digit percentage gains in each of the last three.

A long, cold winter, reduced use of feed supplements and a higher-than-usual cow cull means production is likely to fall this year, which is putting upward pressure on prices.

Fonterra has forecast a 5 per cent fall in milk production but some private forecasters have suggested a decline of up to 10 per cent is on the cards. Far more pressure is likely to come on the market if the current El Nino weather pattern results in drought, as many expect.

At the last auction on September 16, wholemilk powder prices traded at an average price of US$2,495 a tonne. By comparison, the October futures contract traded today (Friday) at US$2875/tonne. The November contract was last quoted at US$3000 a tonne.

"Based on current premiums of futures over GDT - we expect GDT to be up between 5 per cent and 10 per cent on Tuesday," Nigel Brunel, OM Financial's director - financial markets, said.

Chicago-based risk management, advisory and brokerage firm HighGround Dairy said it was "fairly certain" that GDT prices will be higher based on substantially less product being available. "Buyers will be competing for less product which should provide support," it said in a commentary.

HighGround said there were too many uncertainties and potentially bullish outcomes for buyers to sit on their hands when working on their 2016 budgets.

"Short term, we believe nearly every dairy commodity has a bit of upside to it as buyers have legitimate concerns over future supply conditions," it said. "But without supply contraction in the EU and US, a demand surge from China or from a collection of other importing countries, we could see the recent global dairy rally flatten out or fizzle by year's end," it said.

See recent changes in the GlobalDairyTrade prices here:

Fonterra will this year scrap its guaranteed milk price scheme but moves are afoot to introduce a facility aimed at achieving a similar goals.

The NZX has worked on a risk management tool for the milk price and the exchange will be meeting in coming weeks with stakeholders to confirm contract details and a timeline for launch.

"The risk management tool will allow market participants such as brokers and banks to assist farmers with the ability to hedge their milk price in advance," NZX said.

A new contract, settled in New Zealand dollars, would be a welcome addition to the market and a useful tool for farmers, in the absence of a guaranteed milk price.

"At the moment, farmers are not really using our market because they get paid in NZ dollars per kg of milksolids, whereas the current wholemilk powder contract is by the tonne, in US dollars," Brunel said. "At the moment, it doesn't really work for them," he said.