The GDT index was unchanged, an unusual and unwelcome result after four consecutive previous falls over two months.
Lower milk production in northern hemisphere dairy regions because of drought raised expectations the GDT auction prices would rise and break the string of previous losses.
Dairy analysts said their own milk price models indicate $6.40-$6.50/kg MS and demand is weakening in China at the same time as New Zealand production builds up in the new season.
ASB senior rural economist Nathan Penny said the cumulative fall of 9% in dairy commodity prices now looks to be longer-lasting as the falling Chinese yuan stints buying power and lowers demand from the number one buying market.
The lower value of the Chinese currency is an outcome of United States trade tensions that could get worse.
“For farmers this means there’s risk to our forecast of $6.50 and Fonterra’s $7.
“We had already factored in some risk from improved NZ production this season but lower global dairy demand comes on top of this.
“The low NZD is providing some offset but not by enough to fully compensate for the overall dairy price fall.”
Penny made his comments immediately after the GDT on Wednesday morning, before the NZD fell a further 1c to US66.75 on Thursday following the Reserve Bank’s official cash rate announcement.
The NZD was off US2c since the previous GDT on July 17, during the three-week gap between auctions.
Each US1c in currency depreciation benefits the NZ milk price by 10c/kg MS.
Therefore, the dairy analysts could be unduly pessimistic by 10-20c/kg but only if the lower exchange rate persists for the rest of the season.
AgriHQ analyst Amy Castleton said her model has an exchange rate of US70c as a prediction for the whole season and that now looks too high.
Factoring in the futures market price movements and the GDT prices, AgriHQ took 13c off its milk price forecast, which is now $6.40.
“The headline GDT Price Index was flat but the market had anticipated a slight firming of prices which didn’t eventuate,” Castleton said.
“Volumes on offer were considerably higher than at the previous event due to the normal seasonal lift in supply.
“The current level of the AgriHQ milk price forecast and the price of milk price futures indicates Fonterra will be under considerable pressure to achieve a $7/kg milk price this season.”
Westpac senior economist Anne Boniface said the stability in dairy prices on the GDT platform is welcome and her milk price modelling allows for a little further softening in August.
Therefore, the GDT results suggest a touch of upside to Westpac’s forecast of $6.40.
As fits a Dutch-headquartered bank, Rabobank commented more on the European dairy outlook.
Senior dairy analyst Michael Harvey said the dry conditions in northwestern Europe could affect milk flows in coming months.
Ireland had rethought its 2018 production forecast and revised a 5% increased prediction to just flat on 2017.
The heatwave impact in the US is starting to knock milk fat levels, the Australian drought is a threatening crisis and in South America rising feed costs are squeezing margins for dairy farmers.
