Banks downgrade farmgate milk price forecasts after drop at auction

The continued softening of prices at the latest Global Dairy Trade auction has cast doubt on Fonterra's farmgate milk price forecast.

Some economists are expecting further falls as production ramps up in Europe and uncertainty clouds the outlook for skim milk powder.

Fonterra is forecasting $6.75/kg of milksolids for this season, up from $6.12/kg the previous year.

However, some banks have either downgraded their milk price forecasts or are looking to do so after another mixed performance at today's auction, in which the GDT index fell 1 per cent from the previous sale two weeks earlier.

The price of whole milk powder, which has the greatest bearing on Fonterra's farmgate milk price, fell by 0.5 per cent to US$3014 a tonne while another important product, skim milk powder, plunged by 5.6 per cent to US$1797 a tonne amid uncertainty about the European Union's huge intervention stockpile.

Whole milk powder prices have been drifting lower since August 2 and are well down on the year's peak of US$3314 a tonne.

ASB rural economist Nathan Penny said he was sticking with his $6.75/kg milk price forecast - the same as Fonterra's - based on the view that local production looked likely to be curtailed by bad weather.

Fonterra had already rowed back on its own production forecast and was predicting a 1 per cent increase over the previous season, down from its initial forecast for a 3 per cent rise, which Penny said would be supportive for prices.

"Despite the dip in prices overnight, we expect prices to push higher over coming months," Penny said. "Milk is going to be scarcer than we thought, so prices should be going higher, and I think this latest auction result is a bit of a red herring."

Others were not so sure.

ANZ's rural economist Con Williams said near-term delivery prices for the key products were no longer high enough to justify a milk price forecast of $6.75/kg, indicating something closer to the mid-$6/kg range.

"However, prices for key products to be delivered in the New Year are signalling something even lower and broke below the key US$3,000/tonne level overnight," Williams said.

"Combined with higher than expected milk flow from Europe in the New Year and possible unfavourable changes to the European intervention scheme, we believe this warrants some caution," he said. "Hence we downgrade our milk price forecast to $6.25-$6.50/kg for 2017/18."

BNZ economist Doug Steel said Fonterra's forecast was starting to look "tenuous" but his revised forecast of $6.30/kg was still better than last season's price of $6.12/kg.

Among the other banks, Westpac and Rabobank are both looking at downgrading their forecasts, which sit at $6.50/kg.

Jon Spainhour, a broker and partner at Chicago-based dairy specialist Rice Dairy, said he expected prices to decline further.

"Milk production in Europe and the US [is] increasing, and in general prices are falling in this time of high demand," he said. "It's not a good sign."

Rabobank said milk production data, aside from New Zealand, continued to post a picture of supply growth.

United States milk production for the 12 months to July 2017 continued to march along, up by 2 per cent, driven by higher yields and cheap feed, it said.

Irish milk production was leading the charge for growth out of Europe and although the supply engines of France and Germany were still behind last year's production, Poland and Italy were also in positive territory for July, year on year.

Closer to home, milk collections in Australia were up 1.6 per cent in the first two months of the new season.

Rabobank said it believed that the dairy price cycle had peaked.

"If we continue to see weakness in the whole milk powder price in particular, there is risk to our forecast at $6.50/kg."