Milk price indicators look positive

Wholemilk prices need to get back to around US$3000 a tonne before farmers can get back in the black. Photo / Devyn Staines

Dairy futures trading over the last few days suggests physical prices could be in for another big jump at next Wednesday's bi-monthly GlobalDairyTrade auction.

The derivatives market has had a patchy record as a bellwether for the physical market in recent months, but at last week's GlobalDairyTrade (GDT) auction the market was largely on the money.

The auction saw the GDT price index gain 6.6 per cent while whole milk powder prices, which have the biggest bearing on Fonterra's farmgate milk price, rallied by 9.9 per cent to US$2265 a tonne.

Analysts were encouraged by the last sale's outcome, but they stopped short of calling it a turning point as the market has suffered a series of false starts over the last two years.

There were big moves in NZX whole milk powder futures yesterday, with the August contract gaining US$5 to US$2245 a tonne, September rising US$90 to US$2530 and the October contract rising by US$120 to US$2650.

Further out, November was up US$85 to US$2680, December was up US$100 at US$2700 and January was up US$90 at US$2710.

Wholemilk prices need to get back to around US$3000 a tonne before farmers can get back in the black.

The August to December "contango" - the difference between the short end of the market and the longer-dated contract - has widened US$100 out to US$455 a tonne.

"There are large premiums being built into the futures over the last GDT suggesting another large rise is on the cards," said Nigel Brunel, director financial markets at OM Financial.

"Even though we are a week away from the next GDT - momentum appears to be in place suggesting we could get a repeat of the last event."

Concerns were emerging that getting hold of wholemilk powder further down the track, at these low prices, might not be as easy as people first thought.

"At this stage you would be looking at another high single digits move in whole milk powder at the next GDT, but that's still a week away," he said.

Fonterra's latest forecast is for a farmgate milk price of $4.25 a kg of milksolids for 2016-17 - still short of DairyNZ's breakeven estimate of $5.05/kg. The market has been ravaged by the effects of oversupply, particularly from European Union producers, and slack demand from the world's biggest dairy importer, China, over the last two years.

Both issues have been losing some their sting in recent months - EU production is lower as the northern hemisphere heads into the tail end of its season, and China's wholemilk powder imports have been picking up in recent months.

OM Financial's Brunel said prices had been too low for too long and that he expects wholemilk powder to push on to US$3000 a tonne by the year's end.