Market watchers split over GDT price drop

BNZ’s senior economist David Steel says it reflects caution given the global trade outlook. 

ANZ’s Susan Kilsby sees the drop as an indication that buyers are relatively well stocked after strong sales in recent months.

Meanwhile ASB’s Nathan Penny questions whether there is a pullback on milk fat.

Whole milk powder (WMP) was down 1.5% to an average price of US$3138/tonne.  Skim milk powder (SMP) was down 4% to an average price of US$2436/t, anhydrous milk fat (AMF) down 5.7%, butter down 10.3% and cheddar down 14%.

Kilsby told Dairy News the result was disappointing but not unexpected.

“Prices are generally trending down at the moment as buyers are relatively well stocked following strong sales out of NZ in recent months and extra product available from Europe due to milk supply there rising seasonally (peaks in May). 

“However, milk output is not really expanding in Europe on a year on year basis. Just the seasonality is providing a little boost at the moment.

“Demand from China remains strong which combined with relatively small global growth in milk supply should underpin prices going forward. Hence the current correction is more likely to be short lived than the start of a strong downward trend.”

Kilsby says cheese and fats fell the most but these were just corrections from recent strong upward price lifts.

BNZ’s Steel says the 3.4% slip added to the sense that prices have peaked following a strong run higher earlier in the year. 

Price declines were widespread across products at this auction with only casein posting any material increase. 

“The overall price decline was a touch larger than we had expected on the day but fits well with our broad view that prices will drift lower over coming months,” he says.

“This largely reflects our caution given current trade tensions, related uncertainty and slower global growth outlook. The number of participating bidders has reduced as has the number of unsatisfied bidders, both giving a sense of demand not being as strong as it was previously. The supply side looks less threatening from a price point of view.”

Steel says the price decline comes alongside a small bounce in the NZ dollar giving something of a double whammy for milk price calculations at the margin. 

“We remain cautious for the season ahead given the global uncertainties prevailing. Our $6.70/kgMS milk price forecast for the 2019-20 season builds in further declines in international prices.” Last week’s auction result doesn’t look out of line with Fonterra’s forecast range of $6.25/kgMS  to $7.25/kgMS, he says. 

“Not that one auction will ever make a season,” he quips.

ASB’s Penny says butter prices surged through the first half of 2019 before the 10.3% drop last week. Still, prices remain about 23% higher than end 2018 levels.

“This may indicate an easing in global milk fat (butter) markets.  The sudden slowdown in NZ production given the hot and dry summer weather had previously put the squeeze on milk fat markets.”

Last week’s result suggests some pullback, Penny says.
WMP prices are treading water, he says.  The 1.5% drop in WMP was neither here nor there for milk price forecasts, given the low volumes on offer. 

“How prices fare during the spring flush will be the next key test.

“We retain our bullish 2019-20 milk price forecast of $7/kgMS. We continue to expect dairy prices to move towards a cyclical peak later in the year.”

$7.15/kgMS payout still on

Rabobank also says it still anticipates a milk price of $7.15/kgMS for the new season 2019-20.

This is based on forecasts for global supply and demand for the next 12 months.

Dairy analyst Emma Higgins says in Rabobank’s monthly agribusiness update that New Zealand milk collections trailed off as the season drew to a close.

Milk flows for April were 8% behind the same time last year. This pulls season to date milk collections down by 2.3%. Rabobank expects final full season production to land between 1.5% and 2% higher than last year once final tallies are counted.

Markets are now focused on northern hemisphere milk production, she says. EU milk production for March moved into positive territory for the first time since September 2018, lifting 1.1% year on year. US milk production growth has pulled back into modest growth mode, with April 2019 milk flows marginally higher by just 0.1% year on year. This compares to a decline in production for March 2019, the first in six years.

“With the northern hemisphere new season well underway, the spring peak has passed and reports are emerging of strong milk flows providing procurement options.”

Fonterra forecast surprises some

Westpac's Anne Boniface says the bank was a little surprised by the downgrade to the milk price forecast for the season just finished.

Fonterra now expects to pay $6.30-6.40/kgMS. 

“Previously they were forecasting a $6.30-6.60/kgMS range. Given the solid lift we saw in prices over the early part of this year we had expected the 2018-19 final milk price to be closer to $6.50/kgMS. 

“But with the production season now complete, Fonterra has the information advantage so we will take this on board and pencil in a $6.40/kgMS for the 2018-19 season.”

Fonterra’s opening forecast for the 2019-20 season was $6.25-$7.25/kgMS, with advance payments to farmers to be made at the $6.75 mid point of this range. 

“We’re happy to retain a slightly more optimistic view than Fonterra on the outlook for now,” she says. However last week’s auction result was a little softer than had been pencilled in. 

“Markets also seem to be a little more constructive than Fonterra on the outlook for the 2019-20 season, with milk price futures at $6.85/kgMS after earlier briefly trading above $7/kgMS. 

“Another local dairy company, Synlait, has also got a slightly more optimistic outlook than Fonterra and announced an opening season forecast of $7/kgMD for the 2019-20 season.”

Boniface says underlying the bank’s own forecast for 2019-20 is a view that  dairy prices will soften modestly over the second half of this year, as global supply increases a little against a backdrop of relatively firm demand. 

“Some further weakening in the NZ dollar should also help. However, there is clearly a long way to go yet before milk prices for the new season are finalised in September next year.”