Futures market picking milk powder price rise

Cyclone Cook could have an impact on the coming season's dairy production.

Futures market pricing - boosted by the recent run of bad weather - is pointing to a sharp lift in whole milk powder prices at this Wednesday's GlobalDairyTrade (GDT) auction.

Whole milk powder prices spiked higher in heavy NZX futures trading this week as traders bet on production being curtailed next season as a result of the heavy rain, which has caused extensive flooding in the Bay of Plenty.

Karl Arns, dairy futures broker at OM Financial, said the futures market suggested physical whole milk powder prices would rally strongly at the auction. "It's likely to be up sharply by anything between 7 and 12 per cent - almost certainly positive," Arns said.

In the NZX futures market, whole milk powder futures were trading around US$3130 to US$3150/tonne for contracts May through to December.

That compares with the last physical price of US$2924/tonne at the previous GDT sale on April 5.

Fonterra's farmgate milk price for the current season sits at $6.00 per kg of milksolids, compared with DairyNZ's breakeven point of $5.05/kg. Whole milk powder prices around the US$3000/tonne mark are seen as comfortable for most farmers.

Cyclone Cook could have an impact on the coming season's dairy production, DairyNZ said.

The cyclone follows closely on the heels of Cyclone Debbie, which hit parts of Queensland hard and brought high rainfall to New Zealand.

Combined, the effects of both events look likely to hit the tail-end of the dairy season (ending May 31) as rain and silt acts to either kill grass or limit its growth.

Bad weather over the past few weeks could lead to a downward revision of Fonterra's current estimate for a 3 per cent fall for the season from last season, but economists said the impact so far was difficult to quantify.

DairyNZ chief executive Tim Mackle said conditions were "extremely tough" for farmers around the flood-ravaged Bay of Plenty town of Edgecumbe, where a state of emergency has been declared.

"Depending on how the winter plays out, it's possible that the impact of the rain will linger on into the next season and negatively impact on production," Mackle said.

Grass can survive for only a few days under water, and silting can also destroy pasture, which means some farms will need to resow.

DairyNZ reported that between 3500 and 4000 head of stock have been relocated from flooded farms in the Bay of Plenty.

While the impact of the weather on dairy has been small to date, Cyclone Cook risks leading to a larger impact, ASB Bank rural economist Nathan Penny said. He said there was a risk that key dairying regions could suffer some longer-lasting damage.

AgriHQ dairy analyst Susan Kilsby said the higher-than-normal activity on the futures market was not surprising.

"Any weather event will create a lot of uncertainty and [futures markets] thrive on uncertainty," she said.

"No one has been able to quantify the impact on this season's milk production, except that it is not going to be as strong as it ... would have been," she said. "We were having a cracking end to the season, so it's going to take edge off that."

Kilsby doubted the bad weather would have a huge impact on production on a New Zealand-wide basis.

"But there [will] be some farmers who will struggle to get farms ... in a good position for next season."