Friday, March 29, 2024

Milk doubt moves market

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GlobalDairyTrade prices have sunk back to the bottom, having lost all but 10% of the promising rally since December.
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World market recovery appears to be postponed, threatening the start of the 2016 season and the first attempts by dairy companies to set advance prices, now about six weeks away.

For farmers, Fonterra’s flat interim results plus two major GDT reversals showed this season was a write-off and all eyes should turn to next season’s prospects.

Demand for dairy products has not yet increased and supply uncertainties around the European spring, the United States feed grain impact on milk production and New Zealand’s 2014-15 season outcome have contributed to price volatility.

The latest GDT fall of 10.8% was the largest in four years.

The auction results included a 13.3% drop for whole milk powder, a 10% fall in skim milk powder, 25% in buttermilk powder and a 10.5% reduction in cheddar.

Analysts said the auction result showed a correction of earlier fears that NZ drought was going to shorten up supply.

“The February rally in prices has unwound during March as buyers realised that NZ seasonal conditions were not as bad as predicted,” ANZ Bank rural economist Con Williams said.

“Offshore, things remain tough and it appears GDT buyers are well stocked for the second quarter.

“The uncertainty around European supply, now that quotas have been removed, is weighing on the market.

“In volume terms that may turn out to be marginal but in the meantime it is having big impacts on sentiment.”

ASB Bank rural economist Nathan Penny said the market had realised that substantial revisions to NZ milk production weren’t to be feared.

“Prices have now corrected, back to the start of January.

“Even now, Fonterra’s latest prediction of a 2% fall in milk production looks to be pessimistic.

“We think the outcome will be down 1% for Fonterra and even on last season for the industry as a whole – in other words a 1% loss of market share by Fonterra.”

ASB trimmed its 2014-15 forecast to $4.60/kg milksolids and made an early prediction for next season of $6.20.

ANZ stayed within a range of $4.50-4.70 and trimmed next season to $5.75.

Williams noted Westland Milk Products had considered a $6 opening for next season but that was announced before the second big GDT fall.

AgriHQ dairy analyst Susan Kilsby said the latest GDT prices had caused a reduction of 10c in the milk price calculation, now $4.54.

The milk production predictor was at 0.4% rise for the whole season, which would suggest a slight fall for Fonterra.

The dairy futures market had a flat line on whole milk powder prices for the next three months, about US$2400/tonne.

“We are not expecting a massive increase in EU milk – it’s the uncertainty rather than the volume that is moving the market.”

Kilsby thought the way in which Fonterra had first reduced GDT auction volumes then increased them, without explanation, had contributed to price volatility.

“Contradictory information of milk and product volumes means the market is quite mistrustful and therefore uncertain.”

Westpac Bank senior economist Michael Gordon said the “drought premium” that was built into prices in February had now been fully unwound.

“We’re inclined to wait and see whether the fall in prices reflects anything beyond drought effects but our payout forecasts for both this season and the next are clearly on notice.”

Federated Farmers dairy chairman Andrew Hoggard said the disappointing GDT results just turned the screws on already cash-strapped dairy farmers.

“It’s wiped out the gains and put us back down in the trough.

“The big worry is now what happens for next season and where to start budgeting.

“We had been told to expect price recovery by the middle of the year but that is no longer likely.

“If next season achieved $6 that would pull us up and $6.50 would rebuild farmer confidence.”

Related story: GDT pushes predicted farmgate milk price down

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