The price for whole milk powder dropped 13.1% to an average US$1848 a tonne at the latest GlobalDairyTrade auction overnight on Wednesday as many of the monthly contracts failed to attract sufficient bids for a winning price to be published. Continued weakness in dairy prices was being driven by increased supply from NZ, Australia, Europe and the United States amid lacklustre demand in China and an import ban in Russia.
The prospect of already weak milk prices falling further will put more pressure on an already stretched dairy sector, which last month prompted the Reserve Bank to embark on cutting interest rates. Traders were pricing in an outside chance governor Graeme Wheeler will slice 50 basis points from the official cash rate when he reviews it next week.
In trading today, the NZX whole milk powder futures contract for August dropped US$50 to US$1550 a tonne, while the September contract slipped US$40 to US$1585 a tonne, and the October contract declined US$40 to US$1635 a tonne. Analysts said the contracts were trading at a discount to their equivalent levels on the GlobalDairyTrade, implying prices will fall.
“Futures prices have now moved to be trading at a discount to the physical market with traders now predicting further falls in prices over the coming months,” Michael Peters, a dealer at OMF said in a note.
“Traders continue to price in substantial declines in dairy prices with production numbers in dairy being up in many regions around the world.
“Auction volumes are set to considerably increase over the next three months and given some volume yesterday may have gone unsold. As prices did not clear reserve prices, it is hard to be bullish on the dairy front at the moment.”
Weak dairy prices have prompted analysts to pull back their expectations for Fonterra Co-operative Group’s payout to farmers this season, with most now expecting this year’s payout will be below last year’s, which is likely to put pressure on farm incomes and see debt levels rise.
Expectations for Fonterra’s 2015-16 payout range from $3.75 a kilogram of milksolids (MS) to $5/kg MS. DairyNZ estimates $5.70/kg MS was the industry average breakeven point for most farmers.
Auckland-based Fonterra has forecast a $5.25/kg MS payout for the current 2015-16 season, but that is based on prices heading back towards US$3500 a tonne in the coming year. Fonterra’s next opportunity to review its milk price forecast is at its August 7 board meeting.
The next GlobalDairyTrade auction is on August 4 in the US.
