Not since 2002 have international dairy commodity prices been so low and motivation to get up at 4am to milk cows been so hard to find.
Dairy farmers have asked for more regular updates of the milk price forecast but their ability to make onfarm responses that will do any good has all but disappeared.
The GlobalDairyTrade (GDT) auction cycle has become self-defeating and demotivating, after 10 consecutive twice-monthly falls in prices; five long months since any price rises.
The August 5 auction was one of the worst results on record – the GDT index fell 9.3% and whole milk powder (WMP) prices fell 10.3%.
AgriHQ dairy analyst Susan Kilsby said the prices for Fonterra regular grade WMP in the contract 2 period fell 15%, as did prices for anhydrous milk fat (AMF) in the same contract period.
Many of the offered lots failed to budge from their floor prices, which were routinely set by Fonterra at 15% below the levels at the previous auction.
“Many of the products offered by Fonterra sold at their opening prices. This indicates there was not sufficient demand from buyers to match the larger quantities of product offered,” she said.
The volume of WMP powder offered was 78% greater than the previous auction.
“Clearing the greater volume of product was always going to be a challenge in today’s weak market. However, it is still very disappointing that many prices didn’t move above their opening levels.”
Westpac Bank senior economist Michael Gordon said the proliferation of “limit down” price results (the full 15% reduction) across the GDT offering suggested that the downward pressure on prices was likely to spill over into the next auction.
WMP on GDT fell to US$1590/tonne, about half the $3000 level necessary for NZ farmers to cover the average onfarm expenses of production.
WMP prices are $1000 below the low levels reached during the last major market downturn three years ago and have set a new record $300 lower than the Global Financial Crisis bottom in February 2009.
Skim milk powder fell 14.4% to $1419, an all-time low.
The GDT price index (incorporating all traded products) fell to 514, compared with the previous low point of 580 in 2009 and the high points of 1691 on October 2007 and 1573 in April 2013.
Gordon said Westpac’s view of milk price had been reduced from $4.30 to $3.70/kg milksolids.
He pointed at the surge in European milk production following the removal of milk quotas in April, which had come at just the wrong time for any positive effect on international prices.
The other three key drivers of the current market weakness were reduced Chinese import demand, the largely unknown extent of China’s stockpiles and the continuing effects of Russia’s trade ban.
Prices had now fallen to intervention levels for the European Union, which would effectively take volume off world markets and imply some floor for prices, Gordon said.
The United States Department of Agriculture had forecast global milk production to grow by only 1% this year as dairy farmers responded to the low prices by reducing output.
BNZ senior economist Doug Steel said GDT prices appeared to have over-shot downwards and the market had not factored in the El Nino risk to NZ and Australian milk production in spring and the Californian drought effects in the US.
ASB chief economist Nick Tuffley and rural economist Nathan Penny said they expected Fonterra would revise to about $4/kg with a risk that it could go lower.
ASB would stay with a season-end $4.50 forecast but acknowledged that the risks were skewed down.
The bottom of the price cycle must be close, they said, and the 30% price falls over July and August would be sentiment-driven and therefore turn out to be in part temporary.
Over the past month dairy supply had gradually tightened and further risks to supply had emerged.
“The magnitude of the recent price falls don’t, in our view, reflect the balance of these demand and supply risks.”
