Payout looks shaky

Last week’s GDT Event price index drop of 3.5% was the third consecutive decline.

BNZ senior economist Doug Steel told Dairy News prices are down a cumulative 6.8% since September. They are now about the same as a year ago.

The annual comparisons are set to go negative from the next auction if the decline persists, he says.

Chances are now higher that Fonterra will revise down its milk price forecast, says Steel. BNZ has highlighted this risk for some time.

“The only potential saving grace has been a material dip in the NZD over the past month or so. Any forecast update will, of course, include Fonterra’s (unknown) effective forex rate.”

A business update from the co-op is due on November 22.

BNZ’s current forecast is $6.30/kgMS. Westpac last week downgraded its forecast by 30c to $6.20/kgMS. ANZ downgraded to $6.25 - $6.50/kgMS last month and advises further caution. ASB is sticking with $6.75/kgMS for now given the production outlook, but also warns of downside risk.

BNZ’s Steel says rising global milk supply, potential changes to the EU intervention scheme and a relatively weak EUR are key factors behind the price pullback over recent months.

“Skim milk powder prices unexpectedly rose by 1.2%. But at US$1818/t pricing remains weak and is expected to remain that way with ample product in Europe.”  

Fat prices remain very high, but were mixed last week, says Steel. Butter fell 3.6% while AMF unexpectedly rose, albeit by only 0.5%.  

“Wholemilk powder prices fell a hefty 5.5%, perhaps as the market senses a pickup in NZ milk production over recent weeks after a very poor start to the season on previous wet weather. The average selling price for WMP was US$2852/t, dipping below US$3000/t (the RBNZ’s medium term assumption) for the first time since April. 

“The dip in dairy prices (and recent rise in oil prices) is consistent with our view that the terms of trade will ease back in 2018 after posting an all-time high in 2017.” 

Rabobank dairy analyst Michael Harvey says last week’s GDT result was the largest drop since the start of the year.

While both NZ and Australia have had a mixed start to spring, the volume of product in the auction is increasing as Fonterra adjusts its product mix, Harvey says.

“Also, Asian buyers have had a busy few months purchasing so now have some short-term inventory cover; and Chinese buyers have product ready for the FTA tariff window. Hence the biggest fall was for contract period 2 (January delivery).”

But it is not all bad news. “The weaker NZ dollar would be partially offsetting some of the falls. For example, the average price of WMP on the GDT has fallen 9% since the August event. In the same period, the NZ dollar has depreciated 7.5%.

“Of more concern to the global balance is milk production in Europe which continues to pick up pace. What happens from here through first half 2018 with production in Europe will largely dictate global market movements. Latest data for European monthly milk flows were higher than expected.”

But there are many moving parts in Europe, he says. “Of note, farmgate milk prices in key regions have stopped rising. Also, wholesale dairy markets in Europe have started to ease – especially for butter. This will potentially flow through to lower farmgate prices in the coming months.”

Harvey says a Dutch court ruling against dairy farmers objecting to phosphate limits being imposed on their businesses means culling of herds will begin in earnest.

Westpac economist Shyamal Maharaj says China’s growth is expected to slow next year as the government focuses on economic rebalancing. That is likely to crimp demand for a range of commodities.

While Westpac trimmed its forecast last week for the 2017-18 season by 30c to $6.20/kgMS, the bank is more optimistic in releasing its first milk price forecast for the 2018-19 season. “We expect the payout to increase to $6.50/kgMS, on the basis of a revival in the Chinese economy from late 2018 and supported by a lower average exchange rate over the season,” Maharaj says.

ASB says prices can push higher because of the supply impact of a very wet NZ spring.  It attributes recent price weakness to the seasonal peak in auction volumes.

“The increases in auction volumes contrasts to the production outlook,” senior rural economist Nathan Penny says.