Dairy auction prices expected to lift on looming threat of drought

Dairy auction prices may lift next week as the increased threat of a drought looms. Photo / File

Prices on the GlobalDairyTrade auction may lift next week, snapping four consecutive declines, as the increased threat of drought in New Zealand weighs on expectations for Fonterra Cooperative Group's milk production.

The NZX whole milk powder futures contracts for December last traded at US$2,840 a tonne, 3.7 per cent ahead of the equivalent contract at the last GlobalDairyTrade auction on November 21, signalling traders expect the price to rise at the next GDT auction overnight on December 5.

Longer-dated whole milk powder futures contracts are also signalling an increase, as are futures contracts for skim milk powder, while futures for butter and anhydrous milk fat point to declines.

At the last auction, the GDT price index fell 3.4 per cent to a seven-month low of 969 on expectations increased supply would weigh on demand.

Since then, the risk of a drought in New Zealand has heightened, raising concerns that dry conditions may stymie grass growth and impact milk production for the world's largest dairy exporter.

That rising threat appears to outweigh lingering concern about oversupply of skim milk powder in Europe.

"It's a big contest at the moment broadly speaking in dairy between very strong volume growth coming out of Europe and the big stockpiles of skim milk powder in particular up there versus the spreading dry in New Zealand and the potential hit that might have on New Zealand's milk production," said Bank of New Zealand senior economist Doug Steel.

"We are looking for a small gain in the GDT price index overall, driven by whole milk powder. In the context of four declines at the previous auctions, I would categorise it more as some chance of stabilisation."

Still, BNZ continued to expect Fonterra to lower its forecast farmgate milk price for this season from its current level of $6.75 per kilogram of milk solids to $6.30/kgMS. About two thirds of the cooperative's milk price is related to the whole milk powder price. Fonterra will review its forecast payout in early December.

Steel said despite the futures pointing to a lift in the price for skim milk powder, he expected the product to remain weak "for quite some time" given the big stockpile and increased production in Europe.