Friday, March 29, 2024

Good outweighs bad in GDT result

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Big price rises for three dairy commodities in the latest GlobalDairyTrade auction outweighed the negative whole milk powder results as far as Fonterra farmers are concerned.
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Butter milk powder and skim milk powder rose by 14.2% and 12.1% respectively while cheddar rose by 7.8%. Whole milk powder (WMP) dropped 1.7%, as predicted by recent trading on the NZX Dairy Derivatives market.

The resulting 3.4% increase in the GDT price index was a good start to the New Zealand 2016-17 dairy season and the fourth modest increase in five auctions since the beginning of April.

The better results for alternative products would also encourage Fonterra in its wider stream return options for milk processing with its reduced emphasis on whole milk powder (see Robert Spurway on optionality, page 22).

Analysts said the GDT outcome had encouraging signs for a gradual market recovery.

“Overall the dairy commodity market is currently tracking in the right direction but prices are going to take some time to recover to a level where dairy farmers can turn a profit,” AgriHQ dairy analyst Susan Kilsby said. 

“The average NZ dairy farmer needs a milk price of about $5.20/kg MS to break even.

“The weaker WMP price is likely to have been driven by the larger volumes on offer at this event combined with ongoing weakness in demand.”

AgriHQ’s 2015-16 milk price forecast lost 1c to $4.10 and the 2016-17 forecast also lost a cent to sit at $4.63, compared with Fonterra’s own predictions of $3.90 and $4.25 respectively.

ASB rural economist Nathan Penny said the weakness in WMP would have raised eyebrows by on a closer look it was likely to be temporary.

Stronger than expected milk production by NZ farmers over the past few months was the likely culprit and that would be quickly forgotten as the new season gathered pace.

“All up, on the basis of falling production in NZ, Australia and Argentina as well as slowing production growth in the EU, we continue to expect dairy prices to lift over the course of this season,” Penny said.

Westpac senior economist Michael Gordon noted the sizeable gains for other products compared with the WMP price fall.

“The last two auction results provide mild support for our view that the risks are to the upside of Fonterra’s opening forecast of $4.25/kg.

“We currently expect the milk price to end the season at $4.60/kg.”

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