But ASB, ever the optimist, still sees a chance prices will go higher if New Zealand production continues to be hampered by weather.
Last week’s GDT event was described as a “poor result”, by Rabobank’s dairy analyst Emma Higgins, and a “slap in the face for expectations of a moderate increase” by BNZ’s senior economist Doug Steel. ANZ’s agri economist Con Williams says the result “disappointed”.
Overall prices dropped to an average US$3223/tonne, with butter prices down by 3.6% to US$5837/t and the whole milk powder index (WMP) down 2.7% with an average price of US$3037/t .
But ASB’s senior economist Chris Tennent-Brown says volumes sold at the event were the highest in a year. Prices may “spike higher over coming months if conditions for production don’t improve soon,” he says.
However Higgins says higher farmgate milk prices have resulted in more milk from the major exporting regions. That pace will continue to increase although NZ weather will dictate how strong the spring flush will be, she says.
“We still anticipate Chinese buying during the remainder of 2017 to help soak up some of the additional milk; but as the northern hemisphere milk starts to flow for their new season, we are likely to see pressure on commodity prices become evident,” Higgins says.
Rabobank forecasts a 2017-18 full-year farmgate milk price of $6.50/kgMS for NZ.
At last week’s GDT event there were declines in all categories bar cheddar and rennet casein, says Higgins. “This is the largest fall in average pricing since March 2017. While the result could have been worse, it is important to note that October is a crucial selling month from a farmgate milk price perspective as this is when the bulk of NZ product is locked and loaded – forward sold or shipped off.”
Dairy fats led the slump, she says. The anhydrous milk fat price declined by 3.4% to USD$6504 /t, with all contract prices for delivery through to the beginning of the second quarter, 2018, moving lower. Butter prices also dropped by 3.6%.
The WMP drop was “a disappointing result given how wet conditions have been for the season so far,” says Higgins.
“The WMP volumes on offer overnight were the largest for the 12 months. However, it seems as though the market is comfortable that NZ production will not be too adversely affected by the poor start to the season.
“This space will be one to watch over the next couple of GDT events: the window closes for Chinese buyers to obtain dairy product and have it shipped ready to receive a lower tariff rate in the new year.”
BNZ’s Doug Steel says the bounce in the US dollar is putting downward pressure on prices and the EU intervention buying scheme has stopped for now while the euro is weaker, making European product more competitive.
“And it is known that grain prices remain weak and oil prices have edged back a bit from recent highs. But we and the market thought southern hemisphere milk supply challenges, including a slow start in NZ due to recent wet weather, would offer some near-term support to prices. Not so.
“Prices are important at this time of year as they are essentially pricing the bulk of NZ’s seasonal supply.”
The Golden Week holiday in China last week may have temporarily weakened demand.
However Steel says generally lower prices at this auction – and Fonterra indicating a higher effective NZD/USD exchange rate in its recent results compared to those previously assumed – changes the balance of risk on a $6.75/kgMS milk price forecast, he says.
“Risks are to the downside if international prices do not bounce,” he says.
NZ milk production figures for September and October will be important to watch.
However ASB”s Tennent-Brown says NZ production was weak over August and the very wet weather is slowing spring production.
“As long as the wet spring weather continues, it creates the risks that prices will spike higher over coming months, if production at this important time of the year is impacted.”
ASB is comfortable with its $6.75/kgMS and says it could spike higher if production does not improve.
Despite the decline in milk fat prices at the latest auction, butter and anhydrous milk fat prices remain extremely high compared with a year ago.
“Global butter demand continues to surge while supply is struggling to keep pace. With this dynamic in mind we remain upbeat on the outlook,” says Tennent-Brown.
