When breaking down the 12 month forecast by commodity, all of the major commodities were revised lower. Whole milk powder was reduced by 5.7%, skim milk powder by 7.6%. Anhydrous milk fat and butter were trimmed by 6% and 5%, respectively, and cheddar cheese was revised lower by 10% versus two weeks ago.
Significant? We think so. But not necessarily for bullish reasons.
While June and July milk production in New Zealand came in 10% behind last season, sources indicate August milk collections (the first significant production month) will be approximately 9% higher compared to last year, a significant increase given that August 2012 production was nearly 15% higher than 2011. Excellent pasture conditions and strong payout forecasts led farmers to get more of the nation’s herd in-milk earlier than normal. Keeping up that kind of pace in the peak months of October through December will be a challenge but the promise of high payouts will keep dairies producing as much milk as possible. Most analysts are predicting annual production in New Zealand to increase between 3-6%.
The decline in total volume offered on GDT could be construed as bullish as it appears anticipated supply is being reduced. But with the latest New Zealand production estimates, that story will be difficult for anyone to believe much longer.
We will re-state our opinion from two weeks ago that since GDT volume is only a portion of Fonterra’s overall sales, the consistent reduction in GDT-offered volume may represent a shift away from ‘commodity’ product offered to the masses via auction and more toward products made to spec for Fonterra’s contract customers. In fact, Fonterra issued a press release over the weekend announcing its new “world’s largest” whole milk powder drier is now operational.
While global milk prices may continue to be well-supported in the near term as we head into peak demand season, we believe the demand story should be closely monitored as the world’s milking regions WILL respond to high prices with additional supply.
One area of concern has been NZX dairy futures trading over the past week. Volumes remained strong throughout August which set a record but whole and skim milk prices appear to have peaked a week ago. Since early last week, WMP pfutures between November and March have fallen between $60 and $230 per metric ton and skim milk powder futures have also seen prices in deferred months trickle lower. This may be an early indication that confidence in the sustainability of extremely high milk prices for an extended duration is waning.
The next Global Dairy Trade auction will take place this morning and we will have a detailed analysis of the auction in the next 24 hours.
