Dairy lift offers spark of hope

It's too early to say if this morning's auction signals a reversal of the downward trend that has plagued the market so far this year and for much of last year. Photo / NZME

Embattled dairy farmers were offered a glimmer of hope when world prices firmed for the first time this year.

The GlobalDairyTrade price index rose by 1.4 per cent at the yesterday's auction after falling in each of the previous four auctions.

Wholemilk powder prices, which make about 75 per cent of Fonterra's farmgate milk price, rose by 5.5 per cent to US$1974 a tonne.

Jon Spainhour, a broker and partner at Chicago-based dairy specialist Rice Dairy, said it was a strong showing for the protein/powder market. He said the auction, taken with last week's strong Chinese import statistics, could prove a turning point.

In the month of January, China's wholemilk powder imports spiked to 120,561 tonnes, up 52.3 per cent on the same month a year earlier.

China's skim milk powder imports were up by 43.2 per cent over the same comparative periods.

"Those statistics may be a flash in the pan, but if they are not, they will be very significant for the market," Spainhour said.

Even so, prices have a long way to go before farmers can start to break even. Wholemilk powder prices are still about 40 per cent lower than they were a year ago and economists were not rushing to upgrade their farmgate milk price forecasts on the back of yesterday's sale.

"With only four auctions to go before Fonterra's opening milk price forecast for 2016/17, it seems the opening number is likely [to] be low - with a 'four' in front of it rather than a 'five' - weighing on the opening advance and farmers' cash flow for an extended period," said ANZ rural economist Con Williams.

Global milk supply remains plentiful, with supply from Europe continuing to grow particularly strongly, and United States production is also expected to increase this year.

Westpac senior economist Anne Boniface said the result did nothing to alter her farm gate milk price forecasts of $4 per kg of milksolids this season and $4.60/kg in 2016/17.

AgriHQ dairy analyst Susan Kilsby said a sustained price recovery was still some way off.

"Overall market sentiment still remains very bearish as global milk production is still expanded and stocks of dairy commodities are building," Kilsby said.

"China is currently a bright spot, as this market is expected to import a little more milk powder this year as imported product is substantially cheaper than producing milk in China," she said.

But China alone was unlikely to soak up all the excess milk that will become available this year - "hence a sustained price recovery is not expected to happen quickly".

The run of weak sales so far this year has cast doubt on Fonterra's current milk price forecast of $4.15 per kg farmgate milk price.

The co-operative is expected to review its forecast at its first-half result on March 23.

Farmers now face the prospect of two, or possibly three, years in a row of negative returns, with farmgate milk prices now well below DairyNZ's estimated breakeven point of $5.25.

World dairy prices have been depressed because of excess of supply - particularly in the European Union - over demand. Very low grain prices have also acted to as incentive US farmers to produce more milk, adding to the supply-demand imbalance.

Federated Farmers has said lower auction prices would add to pressure on dairy farmers.

A member poll last month showed more than one in 10 were under pressure from banks over their mortgage, up from 6.6 per cent in August and 7.6 per cent in November.

The Reserve Bank estimates the level of debt in the dairy sector at $37.9 billion.

Dairy auction

• Auction price index gains 1.4%.
• Ends a four-sale losing streak.
• Key wholemilk powder prices up by 5.5%.
• Import data shows demand in China is improving.