The GDT index rose 4.2% in the second fortnightly January auction, the best market gain since January-February 2018.
SMP prices were up 10% and whole milk powder, butter, anhydrous milk fat and cheddar all rose 3-4% compared with the first New Year auction.
Westpac analyst Anne Boniface has increased her farmgate milk price forecast by 20c to $6.30/kg milksolids, now at the upper end of Fonterra’s guidance to dairy farmers.
ASB analyst Nathan Penny said the improved market outlook removed some of the downside risk to his forecast $6.
Rabobank analyst Emma Higgins maintained her $6.25 forecast, revised downwards in mid-December, and laid emphasis on the best SMP prices for two years, now back over US$2400/tonne.
The European Union has all but sold its SMP intervention stocks that were depressing commodity prices, the analysts observed.
“After two big tender clearances in December and January buyers are looking to procure SMP while prices are still affordable,” Higgins said.
Fonterra chief executive Miles Hurrell said the strong lift in market prices is a combination of Europe’s previous hot summer and slowing milk production, China’s demand for milk powders and the sell-down of the EU stockpile.
Boniface said the SMP strength in the latest GDT auction was despite an increase in volume sold and the lift was across all contracts on offer.
Buyers from China took 60% of the January GDT products sold, more than was average for this time of year.
“It may be in part due to poor domestic milk production … but the apparent lift in demand comes when other data points to growth slowing sharply.
“While we have expected the decline in dairy prices over the second half of 2018 to reverse, the speed and the extent of the improvement over the past month has exceeded our expectations.”
The revised milk price of $6.30 contains an assumption auction prices will linger near present levels for the next few months, Boniface said.
While there is momentum for them to go higher she is also wary about China’s demand for dairy products as growth cools in other areas.
Penny said the 40% historical premium in prices between WMP and SMP has closed fast to be only 15% now.
“This development is giving a timely boost to global dairy prices, going a long way to offset the downward pressure on prices from bumper NZ supply,” he said.
The next GDT event will on Wednesday, February 6, delayed for 24 hours because of Waitangi Day.
The three-week gap between events will pass nervously for dairy exporters and farmers waiting to see if the new-found strength in prices will persist.
