‘Slowdown in milk production to lift dairy prices later this year’

Following this week’s positive Global Dairy Trade auction, Rural Economist with ASB Bank Nathan Penny has said that continued milk production weaknesses are to lift dairy prices again later in the season.

Dairy product prices rose 7.7% at this week’s Global Dairy Trade, the third consecutive price rise this year.

Penny said that the bank expects prices to consolidate over coming auctions and that dairy markets will need time to digest the rapid price turnaround and assess where to next.

“From there, we expect prices to lift again later in the season. Indeed, while the market now anticipates weak global production, we see scope that the weakening in supply accelerates faster than most analysts expect.

Overall dairy prices were strong at this week’s Global Dairy Trade for the third successive auction.

Since July, overall prices have lifted just shy of 30%. The bounce was broad-based, with all product prices rising.

“However, WMP (up 3.7%) took a back seat to other products and, in particular, milk fats. Indeed, both AMF and butter surged by around the 15% mark.

“Meanwhile, laggard SMP made up some lost ground (at least to WMP), lifting 10%. At this juncture, the initial dairy price correction is largely complete.”

Penny said that dairy markets now share ASB’s view that the outlook for global production is weakening rapidly and that from here, it becomes a question of how weak.

The current relatively flat prices across the different WMP contracts hints that prices could be consolidating over the coming auctions as markets will need to take a breath.

“With that in mind, we look to New Zealand spring production data for a key test of our view.

“Also, with the EU’s production now also clearly on the wane, we expect the wedge between New Zealand dominated products (WMP) and EU-dominated ones (SMP) to narrow. For example, June EU production data showed a 1.6% fall compared to June 2015.”

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