“It’s good to see some sort of stability for a change,” BNZ economist Doug Steel told Dairy News. “It’s a reasonable result to have maintained most of the previous gain.”
Which way the sale would go was up in the air prior to the Wednesday morning auction, with firmer liquid milk prices in the US suggesting a possible lift, but falling oil prices counteracting that.
As it was, skim milk powder (SMP) was back 4.8%, offset by a 2.7% gain in whole milk powder (WMP), the two commodities averaging US$2,834/t and US$2,886/t respectively across all positions.
“From a contract periods point of view the short-term positions were down, probably as a legacy of the pressure from the southern hemisphere late-season supply bulge but further forward, into November and December, prices pushed up, which gives a sense that the market has reached the bottom or is close to having bottomed out.”
While continued volatility is “assured”, the implication is prices could firm towards the year’s end with the thinking being the southern hemisphere can’t possibly have such a good season as the one just gone, says Steel.
“The caveat on that [markets firming] scenario is as long as the world economy doesn’t fall over in the meantime.” That would impact demand which to date has remained “pretty solid” despite the uncertainties.
“One concern is the recent drop in oil prices. While that’s a positive on the farm costs side... we export between a fifth and a quarter of our dairy product to oil exporting countries.”
Weaker oil prices tend to decrease dairy demand from such nations and while it may only be a small decrease, it could be enough to tip the balance in supply and demand.
On the supply side there’s “still a surprising amount of milk” being produced in the US where cows are still being added to the national herd despite a recent rally in feed grains prices.
“It feels like the growth in US milk supply is a bit overdone and it should be softer... but it’s felt like that for a while. Of course they are benefitting from a weaker US dollar.”
Writing in ASB’s Commodities Weekly, US commentator William C Bailey also noted the increase in US dairy prices, “with butter prices reaching levels not seen for several months.”
The increase in Fonterra’s forward auction prices contrasts with pessimistic news from processors such as Danone which have warned Europe’s economic problems will hit profits, he adds.
“Reflecting the challenging marketing environment, the US government reported that butter exports for January-April 2012 were 30% lower than the same period last year. Countering that trend, however, US cheese exports for the same period were 12% higher,” says Bailey.
