Dairy prices poised to fall again

While farmers have locked in $4.50 a kg for the current season, all eyes will be on Fonterra's forecast for the 2015/16 season. Photo / NZME.

With New Zealand supply so strong, forecasters are marking down expected returns and advising caution.

Market signals suggest international dairy prices will again fall at this week's GlobalDairyTrade (GDT) auction.

Based on NZX dairy futures trading, the price of whole milk powder - a key determinant for Fonterra's farmgate milk price - is expected to fall by about 4 per cent at Wednesday's event, which will be the second to last before the end of the season on May 31.

AgriHQ dairy analyst Susan Kilsby said she did not expect any improvement in skim milk powder prices or those for anyhydrous milk fat.

"Volumes for the event are largely as previously forecast but volumes are up from the previous auction, so it's hard to see prices rising," she said.

Demand from the world's biggest dairy importer, China, and supply from the worlds' biggest exporter, New Zealand, have a big impact on GDT prices. New Zealand supply is still strong, with Fonterra predicting production to be 1.45 per cent higher this season than last year, and Chinese demand is still slack.

Fonterra last week said oversupply and extreme volatility on world dairy markets prompted the co-operative to again lower its farmgate milk price forecast for 2014/15 - this time to $4.50 a kg of milk solids from $4.70, having shifted it to that level in December from $5.30.

While farmers have locked in $4.50 a kg for the current season, all eyes will be on Fonterra's forecast for the 2015/16 season as economists say farmers will face financial problems if there are two bad seasons in a row.

AgriHQ last week revised its forecast farmgate milk price for 2015/16 down to $5.70 a kg of milk solids from a previous forecast of $6.50.

ASB Bank rural economist Nathan Penny said he expected to see a sideways-to-down movement at this week's auction.

"Also Fonterra's new, higher production forecast should mean more milk around for longer and thus downward pressure on prices for longer as well," he said. "But prices are very low so there might be some bargain hunters out there, which may explain any potential price strength."

ANZ's Con Williams said his gut feeling was that there would be another decline. "Near term, we still expect to see downward price pressure," he said.

See recent movements in the GDT auctions here:

DairyNZ economists Matthew Newman and Zach Mounsey, in an article published in the latest edition of Inside Dairy, said milk prices were volatile, which was why farmers should approach next season with caution.

They said it was a case of survival first, through trimming costs and improving productivity.

"There has been higher early culling of cows, indicating farmers will take this route as well as once-a-day milking and early drying off, rather than relying as much on purchased supplementary feed, as occurred last season," Newman and Mounsey said.

"Milk prices are volatile and difficult to predict, which is why farmers should approach next season with caution."

At the last sale on April 16, product prices softened but the rate of decline showed signs of abating, with the GDT price index falling by 3.6 per cent, compared with a 10.8 per cent decline at the last sale.

Among the major products, wholemilk powder prices dropped by 4.3 per cent to US$2446 a tonne and skim milk powder dropped by 7.8 per cent to US$2253 a tonne.