“We see evidence of them being awake now and getting prices higher as a result,” he says. But he says there will need to be more evidence of slowing production for better prices to really kick in.
Hopefully last week’s auction will be the first “leg up” and a rebound in confidence is likely in the next auction or two, he says. The overall price index was up 14.8% with whole milk powder up 19.1% to an average price of US$1856/MT.
“In July and August everyone was pretty downbeat, prices got ridiculously low really. They were away from reality of where farmers or producers could produce profitably,” he says.
“The first step is getting confidence back in the markets. The second step is to actually have to see some materially slower growth in production, or if not, some actual falls in production. That would then allow prices to kick up over the next 12 months.”
The “circuit breaker” this auction was the markets starting to think about production being lower this season with El Nino on the radar, more and more commentators talking about production falling with farmers culling heavily, and farmers under pressure with cashflows looking to rein in costs and that flowing through into lower production this season.
Fonterra’s move of lowering auction volumes for the next 12 months was also a factor.
The ASB is holding its milk price forecast at $4.50/kgMS for the season.
ANZ rural economist, Con Williams, says we have seen the bottom.
“But in terms of further improvements from here we would need to see the fundamentals continue to shift in some of the centres of direction in which they have started to flow,” he says.
“A key to that is lower New Zealand production as well as an improvement in demand particularly out of China.
“Constrained supply through GDT has helped, as well as Fonterra changing it product mix away from whole milk powder and the lower supply out of New Zealand. Obviously we are only just calving at the moment, it is very early in the season, we need to see how that plays out.
“We need to see those fundamentals continue to increase in the right direction for price improvement to be sustained.”
Williams says in January/February we saw a rally in prices but the fundamentals underlying that hadn’t changed and prices came down quickly.
“So I guess there is a danger that dairy prices do that again if those fundamentals don’t seem to have moved in the right direction. Things could be a little bit bumpy at the moment depending on how things resolve.”
ANZ’s farmgate milk price forecast is $3.75 to $4/kgMS. The bank dropped it to the mid threes at the previous auctions to show where things had got to but they have now taken out that downside risk.
Rabobank research analyst Emma Higgins says buyers at last week’s event were rushing out to capture the lowest prices ever seen on GDT and that was exacerbated by the significant reduction in offer volumes.
“But the world is still awash in milk and prices are still likely to remain at lower levels until inventories are worked through and global production slows down,” Higgins says.
She says the last event was “absolutely positive and great news” but “we still have a trough to get through and the road is still a little bit long to full recovery”.
They expect a slow climb. The market will remain weak until the end of 2015 and prices start to build significantly increase in mid-2016.
“We expect further strength over the next couple of auctions, before dairy prices start the long grind higher over the remainder of the season (i.e. next 12 months),” the bank says.
