Whole milk powder prices rose by 1.8 per cent to US$2304 a tonne. Photo / John Stone
Dairy prices failed to put on the substantial increase that markets had expected to result from Fonterra's move to further reduce supply at this morning's GlobalDairyTrade (GDT) auction.
Instead, they finished the year on a slightly firmer note with 1.9 per cent gain - well short of the 5 to 10 per cent rise that futures market pricing had suggested.
Whole milk powder prices, which are central to Fonterra's farmgate milk price calculation, rose by 1.8 per cent to US$2304 a tonne.
At that level, whole milk powder prices are short of the US$3000 a tonne required for Fonterra's 2015/6 farmgate milk price forecast of $4.60 per kg of milksolids to come to fruition. DairyNZ's latest estimate of breakeven for most farmers is $5.40 a kg of milksolids.
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Prices for skim milk powder, another key product for New Zealand producers, rose by just 0.2 per cent to an average price US$1,891 a tonne.
Butter registered the strongest gain, rising 9.0 per cent to an average price of US$3,136 a tonne.
Jon Spainhour, broker and partner at Chicago-based dairy specialist, Rice Dairy, said the auction result would have bearish implications for the market, given the reduced amount of product that Fonterra had put up for sale.
"The market had expected a move higher than this, predicated on the fact that the volumes had been reduced," he said. "In the past, this would have led to a bigger reaction than that," he said.
It is my belief that they are saturating the markets that the US and New Zealand would normally be servicing.
He said that while New Zealand was reducing production, European production was increasing.
"The Europeans have a lot of product to offer - their production growth is really moving higher," he said. "It is my belief that they are saturating the markets that the US and New Zealand would normally be servicing."
Whole milk powder prices have been extremely volatile over 2015, peaking at US$3272 a tonne in February before almost halving to US$1590 in August. Prices rebounded to US$2824 a tonne in October before sliding to US$2158 in the following month.
Since then, prices have been improving and commentators generally agree with Fonterra's view in that prices will improve in the first half of next year.
Last week, Fonterra pared back wholemilk powder volumes for the coming 12 months by 9.7 per cent or 37,630 tonnes. About half that amount was taken out of the next four events, which is expected to increase competition among buyers. It also brings annual wholemilk powder GDT volumes to 352,000 tonnes, which would be a five-year low if realised.
Westpac senior economist Anne Boniface it was a soft outturn, given Fonterra had announced a reduction in the volumes offered on the GlobalDairyTrade platform.
More broadly, Fonterra now expects its milk collections to be down 6 per cent over the 2015/16 season from a previous forecast of a 5 per cent decline. "Nevertheless, firmer prices in last night's auction are broadly consistent with our forecast of a $4.50 farm gate milk price this season," she said.
"However, this forecast relies on further improvement in prices in the new year as dry weather takes a bite out of NZ milk production," she said.
ANZ rural economist Con Williams said the sale's result was not conducive to a sustainable recovery taking hold in the first quarter of next year.
"The next four auctions have seen larger reductions in near-term supplies of whole milk powder, which we thought would bring buyers back to the table again," Williams said.
"However, last night's auction suggested they are in no rush yet," he said. ANZ continues to forecast a Fonterra farmgate milk price of $4.25-$4.50/kg for 2015/16.