Milk price forecast looks safe for now despite weak auction

The GDT price index at the latest dairy auction dropped by 2.4 per cent. Picture / Christine Cornege

Fonterra's $6.75 per kg milk price forecast for 2017/18 looks safe for now despite a surprise fall in prices at the latest Global Dairy Trade auction, although much will depend on how the weather pans out over the peak of the season, say analysts.

The NZX Dairy Derivatives market had anticipated a strong lift in prices, particularly for whole milk powder, with plenty of trading activity occurring early this week on the back of curtailed production over August. However, concerns about the weather did not translate into higher prices as expected.

Instead, today's auction saw the GDT price index drop by 2.4 per cent, possibly because of the sheer volume of product on offer.

Economists said much would now depend on how the weather pans out over the high-production months of October, November and December.

If production falls, prices are expected to lift, and vice versa if production picks up.

For many parts of the country, the first 10 months of the year have been abnormally wet and less than ideal for pasture growth.

Metservice meteorologist Georgina Griffiths said September was wetter-than-normal for much of the North Island and for the eastern South Island.

But she said warmer and drier weather lay ahead for most of the country for October.

ANZ bank rural economist Con Williams said New Zealand production was at a critical point where it could go either way in the next two to four weeks.

As it stands, Fonterra's forecast sits roughly in the middle of the $6.50/kg to $7.00/kg of milksolids range that has been estimated by private forecasters over the last few months.

"[The] auction confirmed that there is probably more downside risk than upside risk," he said.

"You are probably going to have to see production cuts and lower GDT volumes to see that $6.75/kg forecast," he said

ASB Bank said there was potential for a combination of recent wet New Zealand weather and surging global butter demand to support prices over coming months.

"Although prices were off modestly overnight, we remain comfortable with our 2017/18 milk price forecast of $6.75/kg," the bank said.

Volumes sold at the event were the highest in more than a year.

"We continue to see a risk that prices spike higher over coming months, if conditions for production don't improve soon," ASB said.

ANZ's Williams said the auction confirmed that the only thing that has been holding whole milk powder and butter prices up recently was short New Zealand supplies.

"While Chinese demand has been solid, it hasn't been spectacular," Williams said.

At the auction, prices fell for all products apart from cheddar and rennet casein, which gained by 1.9 per cent and 0.9 per cent respectively.

Wholemilk powder prices, which have the greatest bearing on Fonterra's farmgate milk price, dropped to US$3037 a tonne from $3122 a tonne at the previous auction on September 20.

Butter prices, which last month hit their highest point since the GDT platform started in 2008, fell by 3.6 per cent to US$5837 a tonne.

Butter milk powder prices dropped by 10.3 per cent to US$1804/tonne.