Dairy prices drop by 7.9pc for third fall in a row

Photo / Sarah Ivey

Dairy prices dropped for the third time in a row at this morning's GlobalDairyTrade auction, the GDT price index falling by 7.9 per cent since the last sale and putting more downward pressure on Fonterra's farmgate milk price forecast for the current year.

Whole milk powder prices, the key product for determining Fonterra's farmgate milk price, fell by 11.0 per cent to US$2148 a tonne.

At that level, whole milk powder prices are well short of the US$3000 a tonne price that Fonterra's current forecast of $4.60 a kg of milk solids rests on. The farmgate milk price forecast comes up for review next month.

Fonterra expects to see more volatility in GDT prices this year, but for an improvement to occur in the first half of 2016.

Another key product, skim milk powder, fell by 8.1 per cent from the last sale to an average price US$1,851 tonne.

Most other products were also weaker, with the exception of butter, which gained by 5.6 per cent to an average price US$2,709 a tonne.

Prices have been weaker in each of the last three bi-monthly sales after they firmed dramatically over August and September.

Jon Spainhour, broker and partner at Chicago-based dairy specialist, Rice Dairy, said the August-September price bubble had popped.

The price gain over those two months reflected Fonterra's move to reduce the amount of product it put up for sale on the GDT platform. Other producers followed suit "but the Europeans were unable to get out of the mud," he said.

Fonterra said this week that production from many of the major producers was declining, with the exception of Europe.

At this morning's auction, demand for whole milk powder was weak, and bidding failed to make the fourth round compared with the usual 8 or 10 rounds.

Spainhour said the auction showed that the supply/demand imbalance that has affected the market looked to be still in place.

"Demand is good but it is being outstripped by supply," he said.

Fonterra has a $4.60 per kg of milksolids farmgate milk price forecast on its books - well short of the $5.30 a kg required for most farmers to reach breakeven.

AgriHQ's theortical farmgate milk price fell by 44c to $4.27/kg milksolids since the last auction, driven by the drop in GDT prices and lower expectations for dairy commodity prices for the remainder of the season.

"The NZX Dairy Futures market shows very little upside for dairy commodities through to the end of the 2015-16 dairy season," AgriHQ dairy analyst Susan Kilsby said.

Whole milk powder prices are now only expected to reach US$2400/t by July 2016, after having fallen US$400/t in the past fortnight, she said in a commentary.

"The current outlook for the dairy markets means Fonterra's milk price forecast of $4.60/kgMS is now under considerable pressure," Kilsby said.

She said it appeared that buyers were generally well stocked and had ample supply options for dairy commodities. "Therefore we currently see very little urgency from buyers," she said.

"The drop in milk output from New Zealand in recent months has been matched threefold by the increase in production from Europe.

"Until global milk supplies drop further, prices are expected to remain soft," Kilsby added.

Fonterra has forecast its milk production to fall this season by at least 5 per cent this season and some commentators expect the decline to be greater than that.

The current El Nino weather pattern, which may result in drought, could further inhibit output, they said.