Fonterra blamed for rise and fall

“The DCANZ production figures for February confirmed production is slowing but not nearly as fast as the market had thought it might, or Fonterra had said it would,” ASB rural economist Nathan Penny told Dairy News.

“That’s a big part of the story of why prices rose so quickly on the back of the drought declaration, and have now fallen.”

Penny’s comments come in the wake of a 10.8% dive in the Global Dairy Trade index at the April 1 auction, the biggest fall in four years. It followed an 8.8% drop on March 17 wiping out February’s index gains of 9.4 and 10.1%.

Those gains followed Fonterra’s January 29 forecast of a 3.3% fall in 2014-15 production compared to the 1584 million kgMS it collected in 2013-14, “reflecting the impact of dry weather on production in recent weeks”.

Penny says such a reduction was possible if the dry had continued across a wide area into February and March but it was “overly pessimistic”, he believes.

That’s echoed by Westpac senior economist Michael Gordon.

“As time has gone on it’s proved too aggressive… Fonterra’s now saying there will be a 2% fall in production but even that’s looking too big which is why we’ve seen these ugly [price] numbers.”

Gordon says the question now is whether the market is simply taking out the “drought premium” or whether there is something more to it. “Over the next couple of auctions we’ll be able to tell.”  

At US$2746/t, the April 1 average winning price was only 9% above December’s nadir of US$2513/t, the lowest price since August 2009.

Penny says global demand for dairy remains “pretty soft” with China seemingly still able to draw on inventory and experiencing weaker domestic demand due to a slowing economy.

“We see that [Chinese] demand picking up as we get further into the year as they are reducing interest rates and removing some housing market restrictions. Lower oil prices should also help in China so we expect to see a lift later in the year but it will take time for that momentum to come back.”

As a result Penny says he doesn’t expect “too much to happen” at this week’s April 15 auction.

A positive in the market is growing US consumption thanks to initiatives to increase sales of liquid milk and positive publicity on the health benefits of saturated fat in butter. “Their dairy consumption per capita has risen for the first time in several years,” he points out.

That’s mopping up more US production, reducing exports, though production is still growing thanks to the buoyant domestic market and low feed – mainly corn – prices.

“But there’s still a lot of extra milk coming onto the global market from ourselves and the EU. Demand will catch up because it’s still growing but 10% growth [in New Zealand output in 2013-14] was just too fast.”

South American production has responded to the lower prices faster but reduced exports from those countries alone will not reverse the price trend, Penny adds.

Forecasts falling

ASB shaved 10c/kg off its prediction for this season’s payout following the April 1 auction, to $4.60/kgMS, and has $6.20/kgMS on the board for next season. 

“That still has time on its side but the risks are on the downside at the moment,” rural economist Nathan Penny says. A fall in the New Zealand dollar against the greenback would help, but ASB isn’t expecting much movement.

Thanks to last season’s high payout most farms “aren’t under the pump yet, but they definitely will be if we have two low seasons in a row,” adds Penny.

Westpac last week said its $4.90/kgMS 2014-15 forecast, and $6.10/kgMS for next season, were under review. “It’s really not looking likely it will be over Fonterra’s $4.70/kgMS forecast now,” senior economist Michael Gordon told Dairy News. “If they had any good news I think they would have delivered it.”