ASB revises forecast to $4.70/kgMS

The auction overnight was weak where it mattered, senior economist, Chris Tennent-Brown, says in an update. Overall prices are now down nearly 47% in annual terms with whole milk powder and skim milk powder down more than 50% since November, 2013.

Both whole milk powder and skim milk powder fell over 5%. This fall was on the back of earlier signs of life, with WMP up nearly 5% over the two auctions prior. Those gains have now been wiped. Casein prices also fell over 12. Bucking the trend were AMF, butter, BMP and cheddar, posting rises of between 1.4% and 6.1%, the ASB says.

Last night's fall was also the 17th out of the last 19 auctions. Moreover, the falls come as Fonterra has reduced auction volumes to try to generate upward pressure on prices. Fonterra's forecast auction volumes for the 12 months ahead has fallen by 14% since June, ASB says.

"But the market isn't buying. Fonterra's milk production remains up over 4% for the season to date (and 6% nationwide). There is still plenty of milk to go around," the update says.

The ASB has revised its milk price forecast down by 40 cents to $4.70/kgMS. This revision includes a much more protracted recovery in prices, although the bank still expect prices to rise over 2015. "We still expect that production and exports will slow materially over 2015 and thus boost dairy prices. That said there is a risk that the timing of this recovery comes later into next season," Tennent-Brown says.