Chinese rebound offers some hope

But it is inevitable Fonterra will need to lower its forecast from its current $5.25/kgMS farmgate milk price, the banks say.  Some bank forecasts have dropped below $4/kgMS. 

ASB is retaining its forecast at $5/kgMS believing there will some recovery from the last two auctions. GDT overall prices have dropped 16.7% since the beginning of July, but ASB sees that based mainly on concerns over China, which may have stabilised.

But ANZ has dropped its forecast to as low $3.75-$4/kgMS and Westpac was revising its forecast to $4.30/kgMS even with some price recovery factored in. 

“The industry is resilient but this is certainly going to test that resilience,” David Jones, PPB Advisory NZ agri head and former Westpac agribusiness head, told Dairy News.

“There is an awful lot of stress out there. There will be broader implications for not just the dairy sector but for the rural sector and the provinces with the amount of spending that is not occurring.”

Westpac chief economist Dominick Stephens told Dairy News Fonterra will “absolutely” have to revise its forecast down. “This is a big change in the price; we suspected the fallout from the Chinese sharemarket and lack of confidence in the economy there would have an effect. It has done.

“A number of products stopped out suggesting there could have been more than 10.7% decline in the overall index. I think there is more to come at the next auction.”

Westpac lowered its forecast to $4.30/kgMS  (previously $5.40/kgMS) and Stephens says Fonterra “absolutely” will revise down to the low fours. He says even that farmgate price assumes a comeback. “So you have to have a bit of recovery to get that level of payout.”

While strong Government support is coming through now in the Chinese economy, only a “brave person” would forecast a lift at the next (GDT) auction, Stephens says. “Even if auction prices rise, say, starting from September, you’re still looking at a very low payout this year.”

ASB rural economist Nathan Penny told Dairy News last week’s drop was expected. “This related to the fallout from the Chinese market concerns and perhaps to a lesser degree Greek concerns,” he says. The bank expects some rebound from the losses of those last two auctions. Efforts to stabilise the Chinese stockmarket and better-than-expected growth numbers out for China last week, could see dairy prices to regain some ground.

“Our $5/kgMS has built in some recovery along with the weakness in the New Zealand dollar. We are currently sitting at around $1800/t for whole milk powder (WMP) but we see it averaging $2400/t for the season,” Penny says. “For that we need to see a steady recovery -- a bounceback from the two recent and a slow recovery over the season.

“Overall, given where the dollar is getting to, we’re sticking to our $5/kgMS for this season. We view the dollar heading down to 61c by the start of next year, so that gives the milk price some offset to the weak current auction prices.”

Jones, from PPB Advisory, says both the European and the Chinese situations affected the latest GDT. “You would certainly like to see it come back in the short term for stability within the industry in New Zealand,” he says.

Fonterra will have to bring back its forecast. To be pragmatic, he says, you would be looking at a forecast around $5/kgMS.

The average price at the July 15 GDT event was US$2082. Whole milk powder declined 13.1% to US$1848, skim milk powder -10.1% to US$1702, anhydrous milk fat -10.6% to US$2621, butter -9.5% to US$2460; butter milk powder -4.4%, cheddar -13.9% to US$2613, and rennet casein -8% to US$5430; lactose rose +1.9% to US$549.