Future sour for dairy prices
Traders predict further falls are to come after low- yielding auction
The outlook for farmgate milk prices remains bleak after this week’s worsethan- expected dairy auction.
NZX dairy futures prices are trading at a discount to the physical market and traders predict further falls over the coming months in the aftermath of the GlobalDairyTrade auction, which saw the GDT index drop by 10.7 per cent.
In whole milk powder, the August NZX futures contract is now priced at US$ 1570 a tonne, September US$ 1580/ tonne and October US$ 1630/ tonne — all at a big discount to physical market.
Auction volumes are set to considerably increase over the next three months and given some volume on Thursday’s auction may have gone unsold, Nigel Brunel, director financial markets at OMFinancial, said.
“As prices did not clear reserve prices, it is hard to be bullish on the dairy front at the moment,” he said.
Traders continue to price in substantial declines in dairy prices with production in dairy being up in many regions around the world — New Zealand included.
Whole milk powder prices, which make up about 75 per cent of Fonterra’s farmgate milkprice, dropped by 13.1 per cent to an average US$ 1848 a tonne at Thursday morning’s auction — well short of the US$ 3500 a tonne required for the coop to meet its current $ 5.25/ kg of milksolids forecast. Fonterra’s board will review its forecast at its next meeting on August 7.
The farmer- funded Dairy NZ estimates $ 5.70/ kg to be the breakeven point for most farmers.
Prices, after a steep decline in 2014, bounced back in February but have been falling ever since. Oversupply, slack demand from China, Russia’s import ban, the removal of dairy production quotas in Europe and higher production arising from cheaper feed costs have all depressed dairy prices.
Economists expect prices to stay low this year before the balance between supply and demands starts to improve next year.
The Reserve Bank has flagged a weak dairy sector as one of three key risks to the nation’s financial stability, saying about a quarter of farmers were operating in negative cash flow.
The bank cut its official cash rate by 25 basis points to 3.25 per cent on June 11 and financial markets are pricing in two more cuts by the year’s end, in part due to very low dairy prices.
New Zealand — the world’s biggest dairy exporter — has contributed to the oversupply situation.
Domestic milk production, despite low prices, the drought early this year and high cow cull rates, reached a record for the season ended at 1.883 billion kg of milksolids, up from 1.712 billion kg in 2014 — a 3.6 per cent improvement on the previous year, which was a record year.
ASB estimated that for Fonterra, the lift was more like 2 per cent as it continued to lose share to other dairy companies. The bank expects production to finally come off the boil this year. If production increased for a third year, then its $ 5.00/ kg forecast would be at risk, the bank said.
Fonterra, under pressure to improve its financial performance to improve its dividends, this week announced that 523 jobs would go, saving about $ 55 to $ 60 million a year.
Fonterra’s issues with low profitability had largely been brought on by big increases in milk production, which had required the co- op to invest more in more plant — mostly multimillion- dollar driers — to process the extra milk.
The co- operative, because of its statutory obligations under Dairy Industry Restructuring Act regulations, is taking in more milk than before.
Fonterra’s six- month net profit was $ 183 million, down 16 per cent on a year earlier and well below market and farmer expectations.