Dairy prices undershot expectations in the overnight auction and some economists say it points to weaker demand and stronger supply, threatening Fonterra Cooperative Group's forecast payout.
The NZX Dairy Derivatives market pointed to around a 5 per cent lift but instead the GDT price index - which covers a variety of products and contract periods - fell 2.4 per cent from the previous auction two weeks ago to US$3,223 (NZ$4,478).
"The fall was a surprise and must be telling us something about demand that the market did not already know," said Westpac Banking Corp chief economist Dominick Stephens. The futures were likely to be a reflection of Fonterra's September Global Dairy Update suggesting poor weather conditions are hampering milk collections, which on a seasonally adjusted basis are down, he said. However, the result "suggests that global dairy demand may not be a robust as thought."
The weak demand could crimp dairy giant Fonterra's forecast payout for farmer shareholders. Stephens expects Fonterra to pay $6.50 per kilo of milk solids in the current seasons versus Fonterra's forecast of $6.75//kgMS. Fonterra reiterated its forecast at its annual result last week.
ANZ Bank New Zealand rural economist Con Williams also said the result disappointed and "really confirms that the only thing that has been holding WMP (whole milk powder) and butter prices up recently was short New Zealand supplies".