‘Global dairy prices expected to lift further in the coming months’

Following yesterday’s bumper Global Dairy Trade auction, New Zealand bank ASB expects dairy prices to consolidate over the next month or so, before lifting further again over the remainder of 2016.

Dairy product prices rose 12.7% at the latest auction, with whole milk powder (WMP) prices a key driver in the rise with an increase of 18.9%.

Rural Economist with ASB, Nathan Penny, has said that after a prolonged slump, global dairy prices have corrected higher.

“We expect the auction price lift over August will be sustained and built upon over the remainder of the season.

“The dairy cycle. The hog cycle. Supply correction. Behavioural change. Whatever you call it, it is here, and dairy markets have pushed dairy prices higher as a result.

“Overall dairy prices were very strong overnight, with the 12.7% overall lift the largest since September 2015. The bounce was broad-based, with all product prices rising.

“On top of whole milk powder’s (WMP) surge, butter and butter milk powder prices bounced 18.1% and 14.1%, respectively. Meanwhile, skim milk powder (SMP) rose a modest 3.0%.”

From here, we expect prices to consolidate over the next month or so, before lifting further again over the remainder of 2016.

On that front, Penny said that ASB continues to look to data that support or challenge its view that rapidly tightening global production will translate into additional price increases.

For example, it estimates that the New Zealand dairy herd has shrunk an unprecedented 5% or 300,000 cows on top of the 3% fall last season.

“This heavy slaughtering is irreversible and will translate into lower production, with the only question being by how much? As a result, New Zealand production data through the spring will be telling.”

Furthermore, with the New Zealand supply response more advanced than the EU’s, Penny said that the bank expects the wedge to widen between New Zealand dominated products such as WMP and EU-dominated ones such as SMP.

“For example, WMP’s premium over SMP has more than doubled to 33% from 15% at the previous auction.”

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