What to make of this weeks Global Dairy Trade result?

Dairy product prices rose for the first time since March at the most recent Fonterra Global Dairy Trade (GDT) auction.

The event comes on the back of 10 negative auctions for prices in a row and with the GDT index now over 50% lower than the highs seen in February 2014.

Average prices paid at the auction rose over another 14.8% on the last event held two weeks previously which itself was down over 9.3%.

According to TJ Flanagan of ICOS the recent rise in the GDT auction is welcome, and he is hopefully that it can be sustained.

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GDT

He said on the basis of the improved butter and SMP prices obtained at the auction, it would suggest a milk price of only 15-16c/L.

“We need to see significant further improvement,” he said.

Commenting on Fonterra’s Global Dairy Trade auction itself, Flanagan said the fact that prices rose in response to lower offered volumes (the volume offered was only about two thirds of the planned tonnage), should demonstrate to New Zealanders that running an auction system the way they do doesn’t act in farmers interests.

“It serves to exacerbate the natural volatility cycle, destroying confidence amongst customers when prices spike, and hammering the producer when prices hit a trough,” he said.

‘Dairy mist has lifted, but outlook is still cloudy’

Market focus has shifted from dairy’s global glut to a potential fall in NZ production this season, according to Kiwi bank ASB’s Rural Economist Nathan Penny.

He said as a result, the bank expects the prices to recover much of the preceding three auction’s lost ground. But from there, further lifts become more difficult, he says.

Penny says the auction lift reinforces our relatively optimistic New Zealand milk price forecast for this season.

But, he said it doesn’t alter the medium-term picture materially.

“On that front, we now expect a more gradual recovery and have lowered our 2016/17 forecast to $6.50/kg accordingly, and this forecast’s risks still point down,” he said.

GDT bottoming out – IFA

In its latest dairy market update the IFA has said global dairy markets are bottoming out.

It says after 9 negative auctions which saw the GDT index fall to a level 69 points lower than the record low 573 points of July 2009, this weeks auction (18th August) saw what all analysts believe to be a reversal of trend.

According to the IFA the product prices of the last few months have translated into unsustainable farmgate prices well below production costs in all world milk production regions.

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The IFA noted that at nearly 37,000t of product traded, the auction was about 10,000t down on the previous auction, as a result of Fonterra reducing in particular their WMP offering.

It says many will comment that this amounts to a manipulation of the auction to improve prices when the NZ season begins.

“Regardless, it ought to improve considerably market sentiment,” it commented in the update.

“While dairy product prices remain very low, and have a long way to go to revert to sustainable levels, this latest development ought to help the sector out of the months of gloom, and could even help prices recover faster than recent commentators have suggested,” it added.

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