Wholemilk powder prices - which play a big part in the formation of Fonterra's farmgate milk price - rallied by 19.1 per cent to US$1,856 a tonne at this morning's GlobalDairyTrade (GDT) auction, raising hopes that prices may finally have turned after declining sharply since March.
Overall, the GDT price index gained by 14.8 per cent. The average winning price at the auction was US$1,974 a tonne, compared with US$1815 a tonne at the last sale on August Whole milk powder prices have fallen sharply since March, when they reached US$3272 a tonne, but futures market pricing in recent days suggested an improvement was in store.
Further out along the price curve, whole milk prices for contract periods from November through to February 2016 all posted double-digit percentage price gains. Skim milk prices, which have also savagely marked down in recent sales, gained by 8.5 per cent to US1,521 a tonne.
Fonterra this month cut its farmgate milk price to $3.85 per kg of milksolids, from a previous forecast of $5.25, and added a 50c per kg support package in the form of a soft loan. DairyNZ estimates the average breakeven price to be $5.40 a kg.
This morning's auction follows a rally on the NZX dairy futures market, which had been firming in anticipation of less product being put up for sale by Fonterra on the GDT platform.
New Zealand and world overproduction has played a role in sharply weaker prices, but Fonterra has said it expects milk production to fall by 2 per cent this season, following a record 1,614 million kg of milksolids collected in the year to May 31.
Eric Meyer, president of Chicago-based risk management, advisory and brokerage firm HighGroundDairy, said it looked like prices had finally bottomed but that he did not expect prices to race higher from here.
"I'm not sure if this is the turning point because supply and demand has not changed," he said. "On the demand side, there is still concern about China and the impact that devaluation may have there," he said.
Meyer said the gain appeared to be more about Fonterra's decision to take product off the GDT platform than any other influence, and he doubted the market was about the make a sharp run higher from here.
The decline is the first in five auctions Photo / Sarah Ivey
"My feeling is that we need to see less milk production to provide enough support for the market," he said. "We have not got to a point of supply-demand balance yet," he said. "This market has not turned around - it is still a bear market."
AgriHQ dairy analyst Susan Kilsby said AgriHQ's 2015-16 farmgate milk price had increased to $3.85 per kg milksolids - in line with Fonterra's current forecast.
"Fonterra's milk price forecast is now looking achievable," Kilsby said in a commentary.
Ahead of the auction Fonterra reduced the volume of whole milk powder on offer this morning by 33.5 per cent compared with its earlier forecast.
"This hefty reduction in the volume available on GDT was the trigger required to turn market sentiment," she said.
The bounce in GDT price exceeded market expectations. "However, it may not be plain sailing from here on," Kilsby said.
"Global dairy markets remain over supplied," she said. "Until global milk supply slows the market will remain very volatile".
Nigel Brunel, director of financial markets at OM Financial said the market by have seen its price lows for now, but that much would depend on local production in the current season.
Among other movements at the auction, anhydrous milk fat prices shot up by 26.6 per cent to an average price of US$2,724 a tonne and butter rose by 10.8 per cent to US2,541 a tonne.
Butter milk powder prices firmed by 13.8 per cent to US$1,400 a tonne and cheddar gained by 4.4 per cent to US2,778 a tonne. Rennet casein firmed by 3.0 per cent to US$5441/tonne. Lactose prices dropped by 7.8 per cent to US$502 a tonne.
Rural lending specialist Rabobank said this week that while the sector was experiencing a severe cyclical downturn, a "substantial" improvement in prices was still expected by mid-2016.
