Record milk price!
A record farmgate milk price for Fonterra shareholders is all but confirmed for this season.
But despite being the third auction in a row to go up, with cumulative gains of 7%, it’s not enough to get excited about, they say. Overall prices remain about 46% lower than at the same time a year ago. And it’s not enough for banks to lift their forecast milk price, with ANZ actually dropping its forecast to $4.35/kgMS last week.
ASB remains most optimistic, retaining its prediction at the same level as Fonterra’s current forecast for this season at $4.70/kgMS. BNZ sits in the middle at $4.50/kgMS.
Rabobank senior dairy analyst Hayley Moynihan warns of another upcoming hurdle.
“The firming trend will be challenged as we get closer to the removal of European milk production quotas on April 1,” Moynihan says. “Volumes on offer from New Zealand start to decline seasonally, but with the Europeans coming into spring and the removal of milk production quotas, that is likely to test market prices the closer we get to April 1.”
However she says last week’s GDT result is “along with our expectations of a very slow price recovery through the first half of this year”. “The most notable thing was the rebalancing in pricing between whole milk powder and returns from skim milk powder and butter,” says Moynihan. “The lift of whole milk powder put the stream returns back into balance.
“But in some respects it is a lacklustre result given the reduction in volumes on offer. It could be argued the price lift could have been stronger but it is a reflection of plentiful product availability globally and buyers being well stocked up. But the positive is that at least it is in the right direction and three auctions in a row have had a slight firming. I think that is further evidence we are at the bottom and at least starting to show some encouraging signs.”
BNZ senior economist Doug Steel also says the GDT result was another step in the right direction. But BNZ sees a downside risk to Fonterra’s $4.70/kgMS forecast given where prices got to in 2014.
“Prices are still lagging what’s required to achieve Fonterra’s $4.70/kgMS. We think around $4.50/kgMS might be closer to the middle of possible outcomes That $4.70 is still possible but prices have to lift fast and a long way still to achieve that.
“We are still optimistic for next season both from the latest few increases we’ve had and some signs the world is starting to receive these lower prices which will ultimately peel back supply and see some genuine price movement down the track.
“This is what we are taking out of the last few (GDT) – that it is sowing the seeds for a better milk price next season coupled with our view that the New Zealand dollar continues to decline.
“So for that season, 2015-16 we’ve currently got $5.70 on the board but the possibilities are wide…. The season hasn’t even started yet. We are trying to forecast very volatile commodity markets overlaid with volatile currency markets and the combination of the two makes it very tricky.”
ASB economist Nathan Penny says there’s tentative signs of a recovery but it is very much “baby steps”. “It has taken a lot of reduction in volumes to get there particularly with whole milk powder. So that has been hard work. Nonetheless it is pointing towards the recovery but gradual.
“We are seeing export growth around the world slow so that should support prices.” But demand is still weak from two big dairy importers, China and Russia.
Beyond this season, we remain broadly positive on dairy prospects,” Penny says in his latest update. ASB expects the 2015/16 milk price to rebound to around $6/kgMS. “But for now, the baby steps are likely to continue,” says Penny.
ANZ’s Con Williams says the last three GDT auctions show that a modest recovery in dairy prices is “about to occur”.
‘Milk fat product pricing has been pretty good over the past four auctions. There was quite a gap between New Zealand sourced butter versus from UK, Europe and other areas five auctions ago, but that gap has closed now.
“All of that is indicative of a bit of recovery starting to occur now. Whole milk powder is up quite a bit.” But he says this was based on “quite dramatic” trimming of product on offer.
“The key question is whether that will continue on to reach the forecast that Fonterra had of $3,500/t by the middle of this year to deliver their $4.70/kgMS milk price. We don’t think recovery will be quite that strong and that’s why we revised down or forecast to $4.35/kgMS.”
