Futures trading suggests big dairy drop

Most banks have lowered their farmgate milk price expectations. Photo / Christine Cornege

A sharp decline in whole milk powder prices looks likely at the twice-monthly GlobalDairyTrade auction on Thursday, with futures market pricing suggesting a drop of about 8 per cent.

Whole milk prices - which are responsible for about 75 per cent of Fonterra's farmgate milk price - fell by 10.8 per cent at the last sale on July 2 to US$2054 a tonne.

Fonterra's farmgate milk price forecast is $5.25 a kg of milksolids for the current 2015/6 season.

Most banks have lowered their farmgate milk price expectations, and ANZ has dropped its forecast for this season to $4.50 per kg of milksolids compared with its previous forecast of $5-$5.25 a kg.

"The next seven or eight GlobaldairyTrade auctions could be brutal with higher seasonal volumes to shift and anecdotal reports that many buyers' immediate requirements are covered," said ANZ rural economist Con Williams.

"Clearly at the last auction the market was struggling to digest that [volume] and I don't think the price action is going to be favourable."

New Zealand's wholemilk powder and milkfat products looked to be below the cost of production for all major producers and in the "affordable zone" for price-sensitive low-income countries, Williams said.

"This doesn't seem to mean too much at present with the market struggling to digest higher seasonal volumes from New Zealand."

China remained largely absent and many other markets in Africa, the Middle East and Asia seemed to have covered immediate requirements through increased imports.

Auction volumes are broadly unchanged for this week's event.

However, August offered volumes nearly double and stay at [those] high levels for the next seven or eight auctions.

NZX futures pricing for skim milk powder, anhydrous milkfat and butter are pointing to gains of 8-10 per cent which would imply little change to the GDT-Trade Weighted Index on Thursday.

ASB Bank rural economist Nathan Penny said Chinese stock market falls were weighing down commodity prices.

"In particular and most visibly, dairy prices are under pressure," Penny said.

The Chinese stock market concerns are likely to have contributed to the price weakness at the July 2 auction, when overall prices - measured by the GDT Index - fell by 5.9 per cent and wholemilk powder prices dropped by 10.8 per cent.

"With the stockmarket concerns heightening since then, another fall is on the cards at the July 15 auction," Penny said.

"Current milk futures pricing suggests a fall of similar magnitude to the last auction."