Strong milk production in New Zealand is putting downward pressure on global dairy prices.
While global stock markets plunged, the Global Dairy Trade overall price index was up 6%, with whole milk powder (WMP) up 8%.
Williams says this will bring year-to-date milk price indicators back in line with Fonterra’s $6.40/kgMS forecast.
Meanwhile Westpac upgraded its forecast to $6.50/kgMS (from $6.20/kgMS in December) and ASB held its forecast at this rate. However Westland’s board last week reviewed the company’s payout prediction, reducing it to a range of $6.20 - $6.50 per kgMS (previously $6.40 to $6.80).
Williams says last week’s GDT improvement was driven by lingering NZ supply concerns and more price sensitive buyers filling the Chinese post New Year void. “Price sensitive buyers have also been aided by a lower USD at recent auctions,” he says.
“Where to now? Technically WMP has traded back toward the top of its recent range (US$2800 - $3200/t) and with Chinese New Year celebration’s coming up a pause is likely.
“That said, supply developments in NZ will remain important. Things remain fairly patchy around the country at present and most still seem to need more follow-up rain to avoid an early end to the season. In saying that, the hotter weather pattern does seem to have been replaced recently.”
Williams notes the next quarter WMP offer volumes will be 30% below last year, which is expected to cause a further squeeze higher in prices.
Additionally the higher EUR/USD is making European pricing less internationally competitive, allowing NZ further breathing space
Michael Harvey from RaboResearch observed last week’s GDT rise was the third increase in a row and its biggest increase for 16 months.
“There were price increases right across the dairy commodity complex, with the all-important WMP price one of the best performers.
“It was a not real surprise given the concern and uncertainty surrounding NZ milk flows this summer.
“We know Fonterra has been managing volumes on offer through the GDT given the falling milk flows.”
There will be plenty of interest in the January milk production number due for release this week, he says.
“Looking beyond the short-term support for Oceania-sourced product due to tighter supply in NZ, market sentiment still remains fairly bearish. European milk flows are gaining momentum ahead of their seasonal peak and the key question remains where will the milk end up?”
They are still waiting on fresh data but RaboResearch knows EU milk production was up 6.1% -- albeit against weak comparables -- in November and gaining momentum.