New Zealand dairy farmers could now dare to believe the worst of an extended downturn in international prices was over, following consecutive increases in the GDT price index totalling 20% in a month.
However, caution was still indicated because of two short-lived rallies during the two-year downturn, of 60% in two months last spring and 30% in three months between December 2014 and March 2015, after which world prices fell again.
This time whole milk powder (WMP) futures prices had risen considerably and combined with the GDT increases boosted the AgriHQ payout forecast by 82c to $5.46/kg milksolids.
The GDT index rose 6.6% on August 3 followed by 12.7% on August 17.
WMP price increases totalled 30%, which mirrored the improvement in Chinese imports.
Fonterra reported China’s dairy import volumes rose 26% in the 12 months to the end of June and 25% in June, compared with the same month last year.
WMP tonnage in June was up 120%, fluid and fresh dairy products were up 45% and infant formula was up 18%. The WMP monthly figure was especially noteworthy because WMP imports for the year to date were up only 6%.
The Fonterra Global Dairy Update for August also reported European Union milk production for May was up 1% compared with a year earlier and the year-to-date figure was plus 4%.
That was considerably lower than the rate of growth of about 10% earlier this year.
May was the third consecutive month where the rate of production growth had decreased.
The EU Commission forecast milk deliveries in 2016 would be up 1.5% compared to 2015.
Whole milk powder prices on GDT had risen to US$2695/tonne, a considerable gain when compared with the sub-$2000 prices earlier this year.
On the NZX Dairy Derivatives market, WMP futures were now trading at $2870 for December contracts and $3000 by next July.
AgriHQ dairy analyst Susan Kilsby believed this world price rally was different from the short-lived ones of the last two seasons.
She was more confident because global milk supply was now retracting rather than growing.
“I think it is now safe to say the market has turned a corner,” she said.
“I am not predicting 10% price increases at every auction but I think buyers are realising that supply will be relatively tight out of NZ this season.”
Susan Kilsby
AgriHQ
Long-awaited market upturns tended to be self-fulfilling as buyers rushed to secure products before prices rose.
“I am not predicting 10% price increases at every auction but I think buyers are realising that supply will be relatively tight out of NZ this season.
“The previous auction it was China doing the bidding. Last auction southeast Asian buyers turned up.”
Westpac economist Anne Boniface said while the fundamentals of supply and demand were moving in a more favourable direction, a fall in prices was possible.
Nonetheless, the fundamentals indicated a lift in the Westpac payout forecast to $5/kg.
Boniface noted the recent demand improvement in China that suggested upside risk to the farmgate milk price if no fall occurred on GDT.
Federated Farmers dairy leader Andrew Hoggard said the GDT increases were very welcome news but he wouldn’t get carried away because of the two sawn-off recoveries previously.
The change in supply and demand fundamentals and the GDT price rises put more reliability into the Fonterra forecast, with perhaps some upside potential.
Milk price futures on the NZX Dairy Derivatives market had also risen and now sat at $4.95 with potential to go through $5, Kilsby said.
The calculation and announcement of the revised farmgate forecast of $5.46 reflected the GDT results and the futures market reactions.
For that price to be the outcome for farmers this season, physical market sales had to trace the path the futures market was predicting, she said.
