GlobalDairyTrade (GDT) auction prices slumped another 2.2% on average on May 19, some commodities recording their lowest levels since GDT began in mid-2008.
Cheese dropped 7.1%, anhydrous milk fat was down 4.8%, skim milk powder (SMP) was down 3.6% and butter and butter milk powder were down 3.2%.
SMP, cheese, casein and lactose were all at record low price levels while whole milk powder (WMP) and butter were close to the bottom.
Perhaps the only comfort for Fonterra’s farmers and investors was that the very low commodity prices must be feeding into excellent margins to be made on value-add and branded products.
Therefore, a possible update on May 27 to the 2014-15 earnings and dividend guidance might provide some relief.
Whatever window of opportunity for improved world prices opened up in February, be it NZ drought-affected milk production or European winter, had now closed for our winter and probably spring.
What Fonterra now calls geopolitical forces and old-fashioned seasonality were running against our dairy farmers.
World markets were over-supplied with milk powders, cheese, casein and other dairy commodities.
European lactose traded on GDT at US$580/tonne, compared with $1600 last August.
Most products were now pitched at half of their levels of as recently as February 2014.
Recovery had been indefinitely postponed, as Federated Farmers dairy leader Andrew Hoggard acknowledged.
Prices might be better in the second half of the new season, in other words “Christmas is coming” but the next six months would be very tight for farmers, he said.
Hoggard said he could see glimmers of hope on the horizon.
AgriHQ dairy analyst Susan Kilsby agreed and pointed out European spring milk production “hasn’t gone crazy”.
“Unofficially, both UK and German milk peaks have passed and they were lower than last year.
“We expect prices to remain low over the next two to three months before finally beginning their lift.”
Nathan Penny
ASB
“Expectations of a strong El Nino, although not yet shared in NZ, should have an impact on milk production in Asian countries, especially China.
“The markets now appear to be slowly starting to turn but this optimism is yet to be reflected in the GDT prices.”
Kilsby’s computer model for the new season was now saying $5.60/kg, down 10c from a week ago.
It assumed WMP prices would return to their long-term average of US$3300/tonne in the second half but without any degree of certainty.
Fonterra would have more detailed predictions based on contracts and conversations with customers but it was hard to see it being unduly optimistic given the strife of the past season.
ASB Bank and Westpac Bank had forecast $5.70 while ANZ Bank was picking something between $5 and $5.25.
Open Country Dairy had already released its 2015-16 forecast, being an average of $4.80/kg for the season.
Its three-stage payment system assumed $4.45 initially, followed by $4.85 in period two and $5.05 in period three.
“Dairy prices are in the doldrums,” ASB’s Nathan Penny said.
“They are low and going nowhere fast . . . at their lowest level since 2009.
“Moreover, we expect prices to remain low over the next two to three months before finally beginning their lift.”
ANZ’s rural economist Con Williams said the latest GDT results for WMP were a little more encouraging, which suggested that a trough was near but a sharp rebound seemed to be a distant prospect.
Westpac senior economist Michael Gordon said several years of higher dairy prices had incentivised other countries to expand capacity in their own dairy sectors.
“Consequently, it’s possible that farmgate milk prices over coming years could be lower on average, after adjusting for inflation, than they were in the preceding five years.”
Gordon said the latest GDT result put downside risk on Westpac’s prediction of $5.70 for next season.
