Some analysts have recalibrated their market expectations, pushing out the crucial US$3000/tonne milk powder recovery level to the end of the season, not before.
Because Fonterra needed $3000/tonne for its majority whole milk powder (WMP) production to deliver on its $4.60/kg farmgate payout, nothing higher was now expected to emerge.
Following two negative GDT outcomes, totalling 10% fall in prices since early October, dairy farmers will nervously anticipate the November 17-18 auction and the milk price revision before Fonterra’s annual meeting on November 25.
The consensus among analysts seemed to be that Fonterra could hold steady at $4.60 but any upside was only wishful thinking.
Milk supply was gradually falling around the world but demand, especially from China, had not yet picked up, they said.
On November 3-4 the GDT index fell by 7.4% to register an average price across all commodities of $US2569/t.
WMP fared worse, down 8% to $2453 and skim milk powder (SMP) fell the same percentage to $2018.
Those average prices achieved at auction were down 13% and 11% respectively from their recent highs, when recovery looked more assured.
That two-month recovery between early August and early October was now beginning to look like the six-auction, three-month recovery from January to March when the market was told that Fonterra’s milk supply volume was falling.
That prediction proved to be wrong and European and United States production continued to increase, prompting market prices to fall continually over four months to their lowest level in August.
It now seemed as though buyers had digested the news of a small drop in NZ production and the further threat posed by El Nino drought predictions for our summer and autumn.
But in the absence of any demand-driven need they would sit on their stocks in the meantime.
“Dairy products are in ample supply and buyers generally have plenty of stock on hand so there is little urgency for them to secure more,” AgriHQ dairy analyst Susan Kilsby said.
“The reduction in NZ milk production is being offset by European dairy farmers.
“Until global milk supplies drop further, prices are likely to remain subdued.
“The current outlook means it is unlikely that Fonterra will be able to lift its $4.60/kg forecast,” Kilsby added.
Rabobank dairy analyst Emma Higgins said she expected international dairy prices around their current levels based on supply and demand forecasts for the next few months.
She did not expect $3000/t levels until May and it would require a bad El Nino or disease outbreak “shock” to push up prices any earlier.
Westpac Bank said it was reluctant to move from its current $5.30 forecast when a potentially severe El Nino was predicted for the summer.
History showed NZ weather events could have a big influence on world dairy prices, but that effect might be waning as European producers ramped up their own output.
Senior economist Michael Gordon also warned against getting carried away with optimism based on the relaxation of the one-child policy in China and the subsequent demand for infant formula.
China already had a higher fertility rate than many developed Asian economies with no family size restrictions.
A policy relaxation in 2013 might have led to unrestrained milk powder buying by importers and formula makers.
“However the actual increase in births proved to be well short of expectations – one of the reasons China was left with an overhang of milk powder inventories that seems to persist even today.”
“Dairy products are in ample supply and buyers generally have plenty of stock on hand so there is little urgency for them to secure more.”
Susan Kilsby
AgriHQ
Other commentators have said younger Chinese couples are postponing children because of career and economic reasons, much like in Western countries.
ASB rural economist Nathan Penny took a contrary view of milk production, saying the market appeared to assume European, US and Australian supplies would replace the NZ fall.
“We think this market assumption is misplaced – lost NZ exports are too big to cover.
“NZ production has not fallen this hard since 1999.
“Moreover, NZ is the largest dairy exporter, and in particular exports the lion’s share of WMP. The EU and others cannot fill the NZ hole.
“As a result, we expect dairy prices to regain recent losses and for prices to move higher over the course of the current season and we stick with our milk price forecast of $5/kg.”
