Wet weather tipped to push dairy prices higher

Milk powder prices could improve if unusually wet weather continues to hamper dairy production. Picture/NZ Herald.

Analysts expect dairy prices to improve at this Wednesday's Global Dairy Trade auction after wet weather hampered the start of the peak months for milk production.

Fonterra said in its update for August that bad weather had dragged 2017/18 season-to-date production down by 2 per cent over the same period last year.

However, the co-operative stood by its 2017/18 season milk collection forecast of 1.58 billion kg of milksolids, which would be a 3 per cent increase over the previous season.

"It is still early in the season, and a close watch is being kept on recent challenging weather conditions," Fonterra said.

Wholemilk powder prices, which have the greatest bearing on Fonterra's milk price forecasts, have mostly been improving this year.

They hit US$2782/tonne in March, rose to US$3312/tonne in May and traded at US$3122/tonne at the last auction in September.

Farmers are looking to the skies for improvements in the weather as the dairy season enters the all-important peak months of October, November and December.

The upper North Island and eastern South Island had received more than their usual annual quota of rainfall in only the first nine months of the year, according to Metservice.

Tauranga, Te Puke, Hamilton, Gisborne, Rotorua, Taupo, Paraparaumu, Christchurch and Ashburton had all received more rain in the first nine months than was typically received across an entire year, Metservice said.

January to September rainfall records have been smashed in the Waikato and in the greater Bay of Plenty region. It has also been an extremely wet year-to-date for Auckland.

"Clearly the concern is that collections are not going as well as expected for this part of the season," said Nigel Brunel, director financial markets at OM Financial.

"We have seen some really big jumps in the [futures] market over the last few days," Brunel said.

"The feedback from Fonterra and our own farming clients is that it is very wet, and that this is hindering grass growth."

Brunel said futures trading today had been brisk, in contrast to the normally quiet start to the week.

"Futures market demand for the November, December and January contracts suggest that there is some short-term pressure going on."

Brunel said predicting Global Dairy Trade auction outcomes had become something of a lottery but that a 5 per cent increase in wholemilk powder prices this week looked possible.

AgriHQ dairy analyst Susan Kilsby said international markets had been slow to react to the fact that New Zealand was having a slow start its season.

"They seem to have woken up to that now," Kilsby said.

Kilsby said low milk powder inventory levels at the end of last season would be supportive for powder prices.

Similarly, very high butter and cheese prices were acting to divert milk away from the standard milk powders, which should also be supportive.

But Kilsby said the sheer size of this week's wholemilk powder offer form Fonterra - 20,980 tonnes compared with 18,250 tonnes at the last auction - could take the edge off any price gains.

Firmness at this week's Global Dairy Trade auction will help underpin Fonterra's farmgate milk price forecast, which currently sits at $6.75/kg of milksolids, up from $6.12/kg last season.

ASB said that if the weather does not improve soon, it could drop its production forecast and raise its own milk price forecast to $7/kg or higher.