Markets take a breather

Nevertheless the market was probably taking a breather after dairy auction prices jumped 10% in September, adding to August’s 20% rise.

ASB’s rural economist Nathan Penny says September may have been the month when dairy farmers put the dairy downturn to bed.

But his forecast of $6/kgMS is not yet matched by other economists, who are sticking around the early $5/kgMS mark. BNZ is forecasting $5.30/kgMS and Westpac’s forecast is $5/kgMS.

At last week’s auction whole milk powder (WMP) fell 3.8% to an average price of US$2681/t and skim milk powder (SMP) was down 3.9% to US$2209/t.

BNZ senior economist Doug Steel says China’s Golden Week holidays may have dented demand, especially for WMP.

The mid-October auction may help shed some light on whether this was the start of a bigger unwind of the strong gains.

“In context, it is only a small GDT price pullback following a very strong run,” he says. “We see the early-October result as consolidation following previous gains. Prices are 38% higher than six months ago.”

Nevertheless prices could well ease a bit further near term, especially if milk production surprises on the high side.

“We say this with an eye on NZ production,” he says. “We think production for the season as a whole will be down around 2% (on fewer cows, less supplementary feed).”

This is a smaller reduction than some forecasts, but last year’s September production was abnormally down because of bad weather.

“But the bigger picture – milk production – has been generally falling in many key areas, including NZ, Australia and the EU,” says Steel.

“Chinese demand remains important as ever, so too the large stockpile of SMP in Europe which, at least, has stopped growing. A recent push higher in oil prices is a plus for dairy prices at the margin.”

A key factor to watch is international grain prices which remain weak, which may mean more milk supply in the US.

Rabobank dairy analyst Emma Higgins says there were fewer participating bidders at last week’s event – 166 versus 175 at the last event.

Given the national holiday in China, it was not surprising that SMP and WMP moved lower. Fats and cheese have moved lower and these products may face some pressure due to the excess stocks held in the US and Europe.

The result reinforces that it “may well be a wobbly road on the recovery”.

Westpac senior economist Anne Boniface says much will depend on how the NZ production season progresses. Pasture conditions will be the key as many NZ farmers have taken a back-to-basics approach as they look to cut costs.

“For now, we continue to assume some further moderation in world dairy prices over the coming months.”

Penny says dairy markets had got a little ahead of themselves.

“The auction price correction over August and September was rapid and large,” he says. “And now it also seems a touch overdone.