Further tumble in dairy prices expected

Fonterra last month cut its farmgate milk price forecast for 2015/6 to $4.15 a kg of milksolids from a previous forecast of $4.60 a kg. Photo / Christine Cornege

Dairy prices are expected to weaken once again by up to 10 per cent at this week's global dairy auction as the market continues to suffer from over- production, particularly by European Union producers.

Futures market pricing is implying a drop in the order of 5 to 10 per cent on the GlobalDairyTrade price index, following the 7.4 per cent drop at the last sale early this month. The past three GDT sales have all registered declines.

AgriHQ dairy analyst Susan Kilsby said she did not expect to see any change in the current supply/demand imbalance over the next six months.

Nigel Brunel, director of financial markets at OM Financial, said he expected tomorrow's sale to show a discount to the previous sale on February 3.

He said futures market pricing also suggested that the market would remain soft through to June or July.

"There is a lot of product out there in the market."

Analysts have pointed the finger at overproduction from Europe as being the main culprit.

Closer to home, a wet January curtailed expectations that the current El Nino weather event would further limit production beyond Fonterra's forecast of a 6 per cent cut.

At the last sale on February 3, whole milk powder prices - which are key to determining Fonterra's farmgate milk price - fell by 10.4 per cent to US$1952 a tonne. Fonterra last month 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 a kg. Farmers are now looking at the likelihood of two sub-$5 years together, following the record $8.40/kg paid in the 2013/4 season.

Rabobank, in its latest Agribusiness Outlook, said dairy farmers faced another difficult year. However, most other primary sectors were expected to perform well, it said.

Hayley Moynihan, Rabobank's general manager country banking New Zealand, said the recovery in dairy prices now risked arriving too late to enable a confident start to the 2016/17 season.

"Dairy prices are expected to begin to pick up in the latter half of 2016, but the timing of the recovery will be driven by how quickly the brakes can be applied to global milk production," Moynihan said.

A weak and falling NZ currency would provide only partial compensation for low international dairy prices for local farmers, she said.

Outside dairy, Rabobank expects a generally strong year ahead for most other agricultural sectors.

Solid demand in key offshore markets, recent progress in export development and generally tight global supply is likely to bring another good year for NZ producers of beef, wool and horticultural products.

The Reserve Bank, in its December monetary policy statement, said the sharp fall in world dairy prices since 2014 had been a key driver of the reduction in GDP growth in the New Zealand economy.