Update: Dairy prices up - NZ production fall likely cause

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

Dairy prices posted their fourth consecutive gain at this morning's GlobalDairyTrade, the GDT price index rising by 9.9 per cent and pointing to a farmgate milk price for Fonterra farmers of around $5.00 a kg of milksolids.

Analysts said the price action was a reflection of a likely fall in New Zealand production.

Fonterra has forecast its production to fall by 5 per cent this season and some forecasters expect New Zealand's total production to fall by as much as 10 per cent. There are also concerns that the current El Nino weather pattern will result in drought, which will further inhibit output.

Wholemilk powder prices, which are responsible for about 75 per cent of Fonterra's farmgate milk price, were up 12.9 per cent to an average US$2824 a tonne, having rallied by SU$1,234 or 77.6 per cent since hitting a record low of US$1590 a tonne in early August.

Skim milk powder traded at US$2267 a tonne, up 13.4 per cent since the last sale and butter milk powder prices were up 13.8 per cent to an average price of US$1945 a tonne.
This morning's price gains have put upward pressure on Fonterra's current farmgate milk price forecast for the 2015/6 season, which sits at $4.60 a kg of milksolids.

ANZ rural economist Con Williams said the gains on the GDT platform would lend further impetus for milk price forecasts to move back toward $5.00 kg.

Westpac said the global dairy market had reacted strongly to Fonterra's predictions of a drop in milk production. "However, notwithstanding the threat of drought over this summer, we think that the drop in production is now at risk of being overstated," it said. "Consequently, we could see international prices soften again by the end of the season," the bank said.

See the GlobalDairyTrade auction prices here:

Jon Spainhour, a partner and broker at Chicago-based Rice Dairy, said the sale was a shade lower than the futures market had anticipated for some products but that it was nevertheless another strong outcome.

"We have seen a massive gain over the last four auctions so I would expect the market to slow down from here at the very least," he said. "There is room for the market to stabilise - this can't go on forever," he said.

The theoretical AgriHQ farmgate milk price indicator hit $5.39 per kg - nearly 80c above Fonterra's current milk price forecast - primarily driven by market expectations of further gains in dairy commodity prices through the rest of the season.

The NZX Dairy Derivatives market indicates whole milk powder (WMP) prices will reach US$3000 a tonne before the end of 2015 and remain above this level for the remainder of the season, AgriHQ dairy analyst Susan Kilsby said.

"This is good news for dairy farmers as US$3000/tonne - about the price required for most farms to break even," she said in a commentary.

Traders said some of the buying in the latter dated contracts at this morning's GDT auction could have been related to New Zealand's free trade agreement with China, which allows for 133,675 tonnes of wholemilk powder and skim milk powder exports to China at reduced tariff rate of 3.3 per cent in 2016.

On the NZX futures market, the longer dated contracts rallied, with June 2016 hitting US$3500 a tonne.