Global Dairy Trade analysis: Prices strong and strong where it matters

Global dairy prices are getting back on the horse, according to Nathan Penny rural economist for New Zealand bank ASB.

After the Global Dairy Trade’s last auction’s strong 9.4% rise, overall prices surged a further 10.1% on Tuesday.

According to Penny for Whole Milk Powder, New Zealands’s key export product, the double bounce was even more impressive with the combined lift over the two auctions totalling over 35%.

However, Penny also says while the price spike is impressive, it comes at a cost.

“This strong result follows last week’s drought declaration and the recent rapid slowing in milk production growth,” he said.

Penny says generally, farmers have begun to respond to lower global farmgate milk prices (and in the case of New Zealand, prompted further by dry conditions) by slowing their production.

Moreover, what the recent auction results highlight is that global dairy markets remain very sensitive to changes in New Zealand milk supply, he said.

Implications

On the back of the results from the last two auctions, Penny said the bank have revised up its milk price forecast for this season by 30c to $5.00/kg.

“We had factored in steadily rising prices over the season, but we are largely there,” he said.

Moreover, he said ABS have lifted its 2015/16 forecast by 50c to $6.50/kg.

“We also expect demand to firm in the second half of 2015, particularly as the Chinese economy perks up, aided by lower energy prices.”

According to Penny while this result has given upward momentum to dairy markets, New Zealand farmers still have to deal with drought (or dry conditions), slowing production growth and the accompanying lower farm revenues in the short term.

“By in large, however, we think farmers are well-placed to manage through this difficult season, and the prospect of a firmer 2015/16 milk price will lift their confidence about the medium term,” he said.

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