Futures market tips big fall in dairy prices tomorrow

Market specialist OM Financial said in a commentary that a decline on the GDT price index of 5 to 10 per cent at tomorrow 's auction would not come as a surprise. Photo / Bloomberg

Dairy farmers will be bracing themselves for still more falls in product prices at tomorrow's Global Dairy Trade auction, going on current futures market pricing.

NZX dairy futures prices have been weak across the board, and the market overall still suffers from an excess of supply over demand.

Market specialist OM Financial said in a commentary that a decline on the GDT price index of 5 to 10 per cent at tomorrow 's auction would not come as a surprise.

"Based on the futures, and what is happening in our markets, it's all looking pretty negative," OM Financial director of financial markets, Nigel Brunel, said.

Whole milk powder prices - which are a key component of Fonterra's farmgate price - were threatening to duck below US$2000 a tonne at tomorrow's auction from US$2188 a tonne at the last sale on January 20.

"With El Nino very benign thus far, payouts dropping and looking weak; the outlook for dairy remains gloomy," Brunel said. "Given these factors and the global picture, it looks to be another painful year domestically," he said.

Rain across much of the country has alleviated concerns that the current El Nino weather pattern would hit output, but Fonterra chairman John Wilson said last week that Fonterra's forecast of a 5 to 6 per cent fall in production for the current season still stood, based on the higher than normal level of de-stocking that has taken place as a result of low milk prices.

With El Nino very benign thus far, payouts dropping and looking weak; the outlook for dairy remains gloomy.

Fonterra last week cut its farmgate milk price forecast for the 2015/6 season to $4.15 a kg of milksolids from a previous forecast of $4.60 a kg in response to weak international prices. The average break-even point for most farmers has been estimated at $5.40 kg.

Combined with the earnings per share range of 45-55 cents, this year's total payout from Fonterra would come to $4.50-$4.55 per kg.

The key factors driving dairy demand are declining international oil prices which have weakened the spending power of countries reliant on oil revenues, economic uncertainty in developing economies and a slow recovery of dairy imports into China.