Surging dollar hurts commodity prices
THE COMMODITY Milk Value (CMV) lost ground in July. It was a mixed month for commodity prices — but it’s been the surging Australian dollar that has done the damage. Butter edged to new record heights, as global shortages continue, adding US$50/t to end the month at a staggering US$6050/t. Despite the high prices demand has remained resilient, however the latest GDT event — where fat prices retreated significantly — might be the early signs that the butter bull market has peaked. It’s unlikely to retreat too far unless there are significant swings in New Zealand’s spring production towards butter and SMP and away from WMP. SMP remains in the doldrums, shedding US$125/t to US$2,025/t at month’s end. EU inventories continue to weigh on SMP values, and as a result of these dynamics, the ratio of protein to fat fell further during July to 0.84 from a long-term average of 2.48. Importantly for Australia’s export returns, spot prices for cheddar were steady, increasing US$75/t to $4,050/t over the past month. WMP was steady despite growing expectations of a good season across the Tasman — holding at US$3,100/t at the end of July. Based on these movements in major commodity prices over July, the commodity milk value lost $0.30 kgMS — finishing the month at $5.65 kg/MS. Looking ahead, downside risks continue to outweigh the upside for the CMV with production growth and more product available in the second half of the year from Europe and NZ. Much will depend on the strength of the Kiwi spring, with the EU likely to be in fairly good balance as domestic cheese demand is expected to absorb much of the milk growth. The Australian dollar trended 8 per cent higher during July, despite Reserve Bank efforts to talk it down.
About the Commodity Milk Value
Freshagenda’s approach to assessing milk price outlooks recognises there are two components of milk prices paid by manufacturers in southern Australia — a commodity value of milk, which reflects the returns from the global market for dairy products, and an additional value captured on top of base commodity returns. The commodity milk value (CMV) measurement and outlook is based on spot prices and Freshagenda’s forecast fundamental value of major commodity products (cheese, butter, whole and skim milk powder), based on our rolling outlook for the global dairy trade balance. Projected product values are converted into a value of milk at farmgate using the industry’s product mix, deducting conversion costs, and converting to Australian dollars per kilogram of milk- solids. Between 2011–12 and 2015–16 the CMV has averaged over 80 per cent of final farmgate returns — ranging between 70 per cent and 95 per cent of the final average price paid by manufacturers in southern Australia.