‘Dairy prices take a small step forward on the road to recovery’

Dairy product prices rose 3.8% at yesterday’s Global Dairy Trade auction, which is a small step on the road to recovery, according to Nathan Penny Rural Economist with ASB Bank.

The price moves are consistent with a recovery, albeit one that has a long way to run, he said.

While seasonal factors are in play, the developing trends are consistent with ASB’s view of what it expects to see over the new season.

Namely, Penny said that ASB expects New Zealand farmers to continue to lead the production response to low milk prices and as production falls in New Zealand, it anticipates prices for Kiwi-dominated products to recover first.

Elsewhere globally, Penny said the response to low prices is slower, but in places like the EU the response is happening.

“When this slower response does kick in, we expect global prices to get a second wind from higher skim milk powder prices and milk fat prices.

“On this basis, we expect Fonterra’s opening 2016/17 season milk price forecast (announced in late May) to be near $5.00/kg.

“But as prices rise further during the season, we expect the milk price will ultimately end the season at around $6.00/kg.”

Global Dairy Trade results

Dairy product prices rose 3.8% in the latest Global Dairy Trade auction, the first time this year the auction has posted consecutive positive results.

At the last auction on April 5, dairy product prices rose by 2.1%. Whole milk powder rose 7.5% at the latest auction, while Rennet Casein also rose 7.5%.

Lactose posted a rise of 8% and skimmed milk powder (SMP) was up by just 0.3%.

According to Penny, the divergence in WMP and SMP highlights the current differences in Kiwi and European production.

Firstly, he said that the winding down in the New Zealand production season is supporting WMP prices, while the opposite is true for the European season and SMP prices.

Also, the higher premium for later-dated WMP contracts as well as the higher price level are consistent with the more advanced New Zealand production cycle, he said.

In other words, with Kiwi production already declining, buyers are looking to buy more in advance than at earlier auctions.

“However, with European production still high, the same urgency for SMP and milk fat buyers isn’t there.

“Nonetheless, we see the global production cycle turning this year and for this to support global dairy prices.

“Indeed, while the European production cycle is a step behind New Zealand’s, low milk prices have begun to weigh on European production as well.

“All up, as the global production cycle continues its turn and with global demand improving, particularly from China, we expect global dairy prices to lift over the new season.”