Better prices tipped at next dairy auction

Photo / Sarah Ivey

Dairy prices are expected to improve at this week's GlobalDairyTrade auction on Wednesday morning, but doubts remain as to how much further improvement is in store.

The NZX futures market is pointing to 10 per cent gain in the GDT trade weighted index after a 10.9 per cent gain at the last auction on September 2 and a 15 per cent gain for whole milk powder against a 12.1 per cent gain to US$2078 a tonne.

"The implied gain for wholemilk powder looks a little too aggressive to us, with our near-term target closer to US$2,200-$2,300/t as opposed to US$2,300-$2,400/t implied by the futures market," ANZ said in a commentary.

However, the key support factors of lower New Zealand supply and China's seasonally high import period means it's possible all the improvement could come at once, the bank said.

Fonterra last week announced its production was expected to fall by 2-3 per cent, but the co-op has hinted that the decline could be far greater that.

Private forecasters are looking at a 5 to 10 per cent reduction, based on a bigger-than-expected cow cull and reduced use of supplementary feed.

See recent changes in the GlobalDairyTrade auction here:

The wildcard for forecasters is the current El Nino weather pattern, which could lead to a drought, which would further impede production.

A weaker production backdrop, combined with a change in product mix and desire by Fonterra to sell a smaller proportion of supply through the GDT platform, have seen further reductions in GDT volumes.

This should be price supportive with the volume of wholemilk powder to be sold via GDT this year now forecast to be 21 per cent lower than last year and 37 per cent below the record 600,000 MT that were sold in 2013/14.

"But this does need to be offset with consideration of a demand side that still looks fairly subdued, and supply competition from Europe, which remains high for now," ANZ's rural economist Con Williams said.

There was plenty of evidence that China's import demand for powders remained fairly lacklustre by historical standards, with higher domestic supply often given as a reason.