Prices started moving higher the NZX Dairy Derivatives market a week ago. This initial price movement was based on speculation that Fonterra would alter its GDT volumes, which it did on Thursday afternoon.
Whole milk powder (WMP) volumes were reduced by 33.5% compared with its earlier forecast. This was the trigger required to turn market sentiment around. Market sentiment can have a large impact on prices in the dairy markets – particularly in the short-term. Over the longer term market fundamentals determine prices, i.e. milk supply and consumer demand.
The NZX Dairy Derivatives market anticipated that WMP prices would rise by approximately 15%.The GDT result exceeded all expectations with the WMP Price Index up 19.1% and Fonterra’s regular grade WMP for October delivery up 23.8%.
The AgriHQ 2015-16 Farmgate Milk Price now sits at $3.85/kgMS, in line with Fonterra’s forecast. The 52c rise in our forecast was primarily due to the lift in NZX Dairy Futures prices. Futures prices indicate WMP will increase a further 45% by the end of the production season. This increase in pricing is factored into AgriHQ’s $3.85/kgMS milk price forecast
The massive lift in pricing seen at the auction overnight is hugely beneficial as it has come at a time when dairy companies are forward selling large quantities of new season product.
While the markets have been given a boost it may not be plain sailing from here. The global dairy markets remain over supplied so milk production really needs to slowdown further in order for the markets to stage a full recovery.
Fonterra has reduced the volume of product that it is selling on GDT but it still needs to sell this product through alternative channels. If the market ultimately views Fonterra’s GDT supply reduction as a marketing strategy rather than a genuine tightening of supply then the price recovery may be short–lived, i.e. a dead cat bounce.
Data that proves milk production in NZ is slowing would be particularly beneficial to the market. Milk intakes were well ahead of normal in May, June and July. While this has little bearing on NZ’s total milk supply, buyers often only look at the percentage changes and don’t take into consideration the seasonality of NZ’s milk supply.
• AgriHQ Farmgate Dairy provides NZ dairy farmers with all the market information they need to be better informed as to what is influencing costs and returns in the industry. It brings together replacement stock and cull cow pricing, latest regional pasture growth information feed market trends around the country. It also outlines the drivers of commodity markets and what GDT auction results mean for your payout.
