Futures pointing to lower dairy prices

The impact of drought on production is not as bad as expected.

International dairy prices look likely to head lower at this week's GlobalDairyTrade auction, according to futures market pricing.

Dairy prices fell by 10.8 per cent at the last GlobalDairyTrade (GDT) auction, bringing to an end the so-called "drought premium" built into prices over February.

Futures market pricing suggested lower physical prices, but the surprise element had been taken out of the market now that it was widely recognised that the impact of the drought on production was not as bad as was first thought, said ASB rural economist Nathan Penny.

Penny expects the current season's forecast to drop to $4.60 a kg of milk solids, from Fonterra's forecast of $4.70, rising to $6.20 a kg next season.

"Overall, the futures markets are pointing down and volumes, compared with the last auction, are higher, so that's another reason to expect downward pressure on prices," he said. "We are looking more and more to next season to see how things shape up."

ANZ economists said the next three GDT auctions were shaping up as being critical in determining where the opening milk price and advance will be pitched for 2015/16.

"This, combined with the wash-up for 2014/15, will have a large influence on farmers' cashflow over the first half of the 2015/16 season," the bank said.

ANZ is holding to its $5.75/kg milk price forecast for 2015/16, but recent auction weakness and the New Zealand dollar's strength raised the risk the opening estimate may come in below this.

GlobalDairyTrade, in its March quarter trading report, said skim milk powder and whole milk powder attracted the highest number of participating and winning bidders, reflecting the substantial liquidity in both markets over the 12 months to March. Average monthly demand in March fell by 14 per cent from the same quarter in 2014.