GlobalDairyTrade prices seen improving

Photo / Bloomberg

Futures market pricing suggests tomorrow morning's GlobalDairyTrade (GDT) auction will be flat to slighter better, but the expected improvement is unlikely to alter current milk price forecasts.

Nigel Brunel, director financial markets at OM Financial, said he expects to see a 2 per cent rise in the GDT price index, building on the last sale's 1.4 per cent gain, and a 2 per cent improvement in key wholemilk powder prices.

Oversupply, particularly from European Union producers, continues to weigh heavily on the market and leading co-operative Fonterra expects prices to remain depressed for six to 12 months.

"It would not surprise me if the auction was a bit flat," Brunel said.

"We still have far too much milk out there and the payout is unsustainable for a large majority of farmers, whether or not they are in great conditions or bad conditions," he said.

"For the ones with high expenses and high debt, we can't really see them surviving another full season."

Fonterra last week cut its 2015/6 forecast by 25c to $3.90 - $1.35 per kg below the estimated average cost of production.

The co-operative will release its first-half result next Wednesday, which may contain commentary around the milk price. Farmers also expect to get an update on Fonterra's extensive China farming operations, and how its foreign exchange hedging policy performed over the six months.

Other big dairy companies have also lowered their milk price forecasts in recent months.

In January, Open Country Dairy, New Zealand's second largest dairy processor, cut its payout by 30 cents to an average price of between $4.00-$4.30 per kg and another major player, Westland Milk, has cut its forecast to $4.15-$4.45 per kg.

The smaller Waikato dairy co-op - Tatua - which is often held up as a good example by "added value" exponents, has kept its payout at $6.00 kg but chief executive Paul McGilvary said it was feeling the pinch.

"Our prices, particularly for bulk ingredients, are really under pressure," he said. "We will re-forecast in May and I don't know what that will show, but right now we are holding with $6.00," he said.

About 40 per cent of Tatua's production is in specialised proteins and fats while the rest is in the bulk products - caseinate, anhydrous milk fat and whey protein concentrate.

"We can't defy gravity and we are definitely feeling the pain like everybody else is," McGilvary said.

"It's a tough environment for farmers. The long term future of the industry is quite positive but it's hard to see a lot of upturn in this calendar year."

Tatua's milk production has forecast production 15.2 million kg of milk solids - the same as last year's - and the co-op is on track to achieve that.

DairyNZ estimates 85 per cent of dairy farmers will lose money this season compared to 49 per cent last season. As a sector, dairy last year contributed 29 per cent of the total value that New Zealand earned from its merchandise exports, and 37 per cent of the country's total primary industry export value.