Surg­ing dol­lar hurts com­mod­ity prices

Dairy News Australia - - MARKETS -

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.

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