Wednesday, 13 September 2017 08:55

Dairy markets finely balanced

Written by  Pam Tipa
Doug Steel. Doug Steel.

BNZ is sticking with its $6.75/kgMS milk price forecast – or perhaps a little more – while the ASB says $7/kgMS could be on the cards if rain persists.

BNZ economist Doug Steel says there are plenty of factors to watch but nothing to alter its 2017-18 milk price forecast of $6.75/kgMS.

“This view includes a mild drift lower in dairy product prices from current levels as global milk supply increases. Low grain prices are part of this view,” he told Dairy News.

“On the other side, offering some support are a stronger Euro (making European product less competitive) and stronger Chinese Yuan (lifting Chinese purchasing power).

“At present, risks to a $6.75/kgMS milk price forecast seem reasonably balanced, if marginally to the upside.”

Last week’s 0.3% rise in the GDT was again a touch weaker than futures markets implied, says Steel.

“Milkfat price strength continues. Butter prices rose 3.8%, with near term pricing over US$6000/tonne. Anhydrous milk fat prices rose 3.6%.

“High milkfat pricing is occurring despite more milk being channelled toward fat products, indicating strengthening underlying demand.” 

In contrast, milk powders eased, with skim milk powder down 1.2% at a low US$1944/t and whole milk powder fell 1.6% but is still at a healthy level of US$3100/t.

“There is no sign that the market is overly concerned about a wet winter denting NZ production in spring, with powder prices drifting lower.

“The NZ production outlook remains a focus; we look for NZ production to be up about 3.5% for the season as a whole.

“Or if there is concern about NZ (and AU) production it is being offset by other factors: perhaps there is some angst creeping in about future demand as geopolitical risks rise in North Asia.”

Rabobank dairy analyst Emma Higgins says last week’s result was “fairly benign”.

“Futures markets were suggesting whole milk prices (WMP) were likely to increase at least 3%. But the WMP index was down 1.6% with an average price of US$3100/t and would be somewhat disappointing for farmers.

“Outside of WMP, healthy demand (and global supply shortages) for butter and dairy fat continues to be an important driver and saw prices rise sharply again,” she says.

“Milk production data... continues to confirm a period of growth ahead. For example, Irish milk production in the first half of 2017 was up 6.6% and Fonterra reported its NZ milk collection was up 10.4% in the first two months of the season (albeit, these are low volume months). Meanwhile, US milk production for the 12 months to June increased by almost 2% versus the same period in the previous year.

“Fortunately, Chinese import purchasing has been active, helping keep markets in balance. The latest data shows NZ total exports to China reached 84,272 tonnes for July (+ 86%), and WMP exports to China were also up, reaching 32,884 tonnes (+114%).”

ASB rural economist Nathan Penny says the rain is starting to hurt production. 

“Reportedly, production is down versus last season in some key regions.  While it is still early spring, if the rain continues and production remains weak, prices will rise.

“Meanwhile, global demand for milk fats continues to surge.  In Europe, butter shortages have led to a price spike in European prices to US$7750/t, well above current NZ prices.  At these levels Europeans buyers are likely to turn increasingly to NZ for butter supply.

“These developments are a recipe for higher prices.  Time is running out for NZ weather to improve.  If it doesn’t soon, we see potential for this season’s milk price to quickly move to $7/kgMS or above.”


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Payout looks shaky

Fonterra's forecast milk price of $6.75/kgMS is looking shaky, bank economists agree.

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Dairy prices have cumulatively eased only 3% after falling in four of the past five auctions, says BNZ senior economist Doug Steel.

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Although last week’s GDT price index eased 0.4%, the dairy auction was generally positive, especially the 2.6% lift for whole milk powder (WMP), says ANZ rural economist Con Williams.

Daring to mention $7/kgMS

BNZ rural economist Doug Steel has dared to mention $7 for the new season milk price, but with very strong notes of caution.


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