ASB lifts forecast to $5kg/MS

ASB expects milk production to fall 5% this season – the largest fall since 1999. It says recent auction volume reductions are distracting from this weak production picture, it says.

“This lift and our very weak production outlook results in a lift in our milk price forecast to $5/kgMS  by season end,” says rural economist Nathan Penny. 

“This result is materially better than the RBNZ has factored in; we maintain our view that the RBNZ cuts the OCR by further 25bps this year, but the balance may be moving towards a December move rather than one in October.”

Overall dairy prices spiked 16.5% in last night GDT for the third consecutive strong gain, ASB says in its Quick Overview report.  The lift was higher than its expectations for a circa 10% increase.  WMP prices posted another strong lift, rising 20.6%.  SMP prices weren’t far behind, recording a 17% rise. 

“We expect prices to kick on over the rest of the season as production weakens materially on the back of the 5% production fall this season compared to last,” Penny says. 

“Farmers have and continue to expect to cull aggressively this season, leading to an overall fall in the dairy herd size.  Spring growing conditions have also been generally weak and supplementary feed is being used sparingly.

“In this light, the reductions to Fonterra’s auction volumes are to a degree a distracting from this message i.e. production is shaping up to be very weak this season (a 5% fall would be the largest since 1999), and that will put pressure on prices over coming months, particularly as data become available to verify this fall.”