Dairy prices end four-sale winning streak

Photo / Sarah Ivey

The GlobalDairyTrade's four-auction winning streak came to an abrupt end this morning when, at against market expectations, prices fell by 3.1 per cent, taking the New Zealand dollar down with it.

Whole milk powder prices, which are key to determining Fonterra's farmgate milk price, dropped by 4.6 per cent to US$2694 a tonne after an explosive shift higher over the last previous four auctions.

Another key product, skim milk powder, fell by 4.5 per cent to US$2178 a tonne while butter prices lost 11.1 per cent to US$2850 a tonne.

An overnight rally in the New Zealand dollar - which saw the currency reach US68.40c was punctured by the decline. The currency dropped by just over half a US cent, from US68.10c to US67.50c just after the early morning auction.

Sam Tuck, ANZ senior foreign exchange strategist, said the auction showed that dairy prices still had a way to go before reaching they matched the cost of production. "The (foreign exchange) market does seem to be more sensitive to the downside," he said.

Today's price action was against market expectations - NZX dairy futures had predicted both wholemilk powder and skim milk powder prices would lift again.

"It is certainly looking like a bit of a setback because we were expected to see some gains," Eric Meyer, president of Chicago-based risk management, advisory and brokerage firm HighGroundDairy, said. "It's well below expectations."

After this morning's auction, whole milk powder prices are still short of the US$3000 a tonne level that Fonterra is understood to be comfortable with.

The co-operative currently has a $4.60 per kg of milksolids farmgate milk price forecast on its books - well short of the $5.30 a kg required to reach the estimated average breakeven point for most farmers.

Fonterra has forecast its milk production to fall of 5 per cent this season and some forecasters expect New Zealand's total production to fall by as much as 10 per cent.

There are also concerns that the current El Nino weather pattern will result in in drought, which will further inhibit output and put upward pressure on prices.

ANZ said the recent market rally may have gotten a little ahead of itself.
"At present prices remain consistent with Fonterra's 4.60 per kg 2015/16 milk price forecast, but if predictions of an El-Nino event come into fruition, prices could move up sharply in the New Zealand summer months," the bank said in a commentary.

AgriHQ dairy analyst Susan Kilsby said NZX Dairy Derivatives market still shows dairy commodity prices trending up in the coming months but the rate of growth has slowed.
"A fortnight ago whole milk powder (WMP) was expected to reach US$3000/t by the end of 2015 but this price is now not expected to be achieved until May 2016," she said.

"The slow down in the recovery of the dairy markets will be disappointing for dairy farmers whose cashflows have been squeezed by two seasons of low milk prices," she said.