NZX milk futures fall from record after GDT, still above Fonterra payout forecast

NZX clear to launch futures contract bringing risk-offset tool to Kiwi farmers.

New Zealand milk price futures have fallen in the wake of the latest GlobalDairyTrade auction, having reached a record in the run-up to this week's sale, but remain above the payout level forecast by most of the country's milk processors.

The NZX milk futures contract for the 2016/17 season hit a record $5.65 per kilogram of milk solids ahead of the GDT overnight on Tuesday, and recently traded at $5.50/kgMS. That's still above the base milk price forecast by the country's major milk processors, with Fonterra Cooperative Group this week updating its forecast to $5.25/kgMS, while Synlait Milk's is at $5/kgMS, Westland Milk Products at $4.75-to-$5.15/kgMS, Miraka at $4.55-to-$4.80/kgMS, and Open Country Dairy at $4.60-to-$4.90/kgMS.

Tatua sits above the futures with a current forecast of $5.50-to-$6/kgMS while Oceania Dairy didn't immediately respond to a request for its forecast.

The futures contract was launched on May 27 as a way for dairy farmers and processors to hedge the price of milk at the farm gate amid volatility in dairy prices. The futures price has gained 27 percent since the contract was launched at $4.35/kgMS, tracking gains in the GDT on optimism declines in global milk production would underpin demand for New Zealand's major export commodity.

Whole milk powder, New Zealand's key product, slipped 0.2 percent at this week's fortnightly auction, snapping four successive gains.

"Considering the contract is only a few months old now, it's a really good start," said OMF commodities dealer Karl Arns. "It has surprised a few people how much participation there has been, and how many people are using it at this early stage."

The price "compares quite favourably with Fonterra's recently updated forecast," Arns said. "Nobody expected it to be sitting at these levels so soon, it really has been quite a remarkable turnaround."

Some 1,746 lots have traded so far in the current 2017 milk price futures contract, each of which is for 6,000/kgMS, meaning a total of 10.5 million kg/MS has been hedged for the season so far.

ANZ Bank New Zealand rural economist Con Williams suggested the recent rally in milk powder prices could take a breather for a period as demand from China softens after buyers secured enough product to take advantage of a lower tariff rate under New Zealand's free-trade agreement at the start of each calendar year.

Still, he said the recent rally in dairy prices appears more durable than those of the past two years, underpinned by signals of broad-based demand and tighter supply.

NZX whole milk powder futures are signalling prices will rise at the next GDT on Oct. 4, with the futures trading at a premium to their equivalent contracts on the GDT.