Its is now mid May since the GDT index registered a rise and during that four and a half months the dairy market has lost a cumulative 15.7%.
That is a slow decline by international dairy market standards, showing supply and demand are balanced but the market is worried by New Zealand milk production recovery.
Rabobank said near-perfect weather and more cows milked over the winter resulted in production growth of 5% year-on-year during the seasonal trough from June to August.
NZ farmers also report considerably increased milk flows in September, in the run up to peak production in late October.
NZ is the world’s biggest dairy products exporter.
However, milk output around the rest of the world has been static or declining, particularly in drought-hit areas of Europe.
Aggregate production in the Big 7 (Europe, the United States, NZ, Australia, Brazil, Uruguay, Argentina) was 1% higher year-on-year during the first six months of 2018, Rabobank said.
Rabobank dairy analyst Emma Higgins said the jump in NZ milk supply has created a lack of buyer urgency for Oceania-origin products over the past quarter and that continued in the most recent GDT event.
“This lack of buyer urgency has resulted in weaker pricing which fed into the bank’s downward revision to its full-year forecast from $6.80/kg MS to $6.65 for this season,” she said.
Fonterra reported the European Union and US have increased dairy exports by a combined 440,000 tonnes in the 12 months to May and July respectively.
China took almost all of that increase, its imports up 17% or 394,000 tonnes to March, two-thirds of which was infant formula, whole milk powder and skim milk powder.
Imports across the Middle East and Africa were up 4% or 148,000 tonnes in the year to May with SMP, cheese and fresh products predominating.
Fonterra said its North Island collection was up 2% in the first three months of the NZ season and South Island production was up 13%.
Poor seasonal conditions in Australia mean milk collection is down by 8% in the first two months of its season.
The latest GDT contained large falls for milk fat products with butter down 5.9% and anhydrous milk fat down 4.4%.
At $US4000 and $5000/tonne respectively they are down 30% and 20% since May but are still above their long-term averages.
ASB senior rural economist Nathan Penny said weather conditions in NZ were favourable to dairying and good on-farm cashflows facilitated buying of feed and fertiliser to boost production.
“NZ production will be a key factor for the direction of prices over the remainder of the season.
“We anticipate growth of 2% and production in excess of this would lead to additional price weakness and vice versa.”
While prices had fallen 15% in US dollar terms they had fallen a much more modest 2.5% in NZ dollar terms, which is propping up the farmgate milk price.
Penny maintained his $6.50 forecast while noting the downside risks.
For Westpac, senior economist Anne Boniface noted the same risks stemming from NZ production running 5% ahead of last year and said her forecast is $6.25.
