Bank of New Zealand raised hopes that dairy prices, are near to a bottom, even as fears grew that Fonterra, the world’s top milk exporter, will later this week reduce its forecast for milk payouts to a 13-year low.
The bank acknowledged the extent of the gloom which drove dairy prices at Tuesday’s GlobalDairyTrade auction to their lowest since November 2002.
“It seems at the moment that no one wants to catch the falling dairy price knife,” BNZ, a subsidiary of Commonwealth Bank of Australia, said.
“This dynamic is understandable given that well-stocked buyers can put off buying now, with the possibility that prices will still be low, or lower, at future auctions.”
“For now, the risks [to prices] are down.”
‘Nadir is nigh’
However, the bottom for prices “is nigh”, BNZ added, saying that price falls are being “sentiment-driven”, rather than reflecting supply and demand fundamentals, and thus “are likely to be in part temporary.
“Over the past month or so, dairy supply has not changed materially – to the contrary, supply has tightened gradually and the risks are that it tightens further.”
The bank flagged a shift by Fonterra away from diverting milk towards making higher-valued products, with the co-operative last week cutting by 9% its forecast for year-ahead volumes of whole milk powder sold at GlobalDairyTrade, where it is the benchmark commodity.
Furthermore, the growing El Nino weather pattern is raising the risk of drought in the east of New Zealand, the top milk exporting country, raising further the risk to production volumes which lower milk prices are also exacerbating.
“We expect NZ production this season [2015-16] to be on par with last season, if not fall,” BNZ said.
‘As bad as it could have been’
The comments contrast with the downbeat reports after Tuesday’s auction, which Australia & New Zealand Bank termed “about as bad as it could have been”.
Prices at GlobalDairyTrade have fallen by 47% in the past five months, with prices of skim and whole milk powder more than halving.
The latest decline prompted some New Zealand producers to question whether GlobalDairyTrade should be suspended, with Chris Lewis, president of Wakato Federated Farmers, saying that the auctions were being “gamed by buyers and the price for that is being paid by [the] New Zealand farmer”.
The fall is also seen as boding ill for Friday’s Fonterra board meeting, which will revise the forecast milk price for producers in 2015-16, and is expected to implement a hefty downgrade from the current estimate of NZ$5.25 per kilogramme of milk solids.
“Given that the next seven auctions account for a significant chunk of annual [GlobalDairyTrade] whole milk powder sales, it doesn’t take a rocket scientist to work out that auction prices of the next two months will weigh heavily on the final milk price outcome for the 2015-16 season,” ANZ said.
BNZ acknowledged estimates for Friday’s Fonterra payout figure as low as NZ$3.34 per kilogramme of milk solids, a level not seen since 2002-03, when the co-operative paid producers exactly that level for milk.
The bank itself forecast a figure of NZ$4.00 per kilogramme of milk solids, “with risks that it goes lower than that”.
However, it stuck by an estimate that, with revival ahead, New Zealand prices will end up averaging NZ$4.50 per kilogramme of milk solids for 2015-16, while recovering to NZ$7.00 per kilogramme of milk solids next season.
(Source – http://www.agrimoney.com/news/end-of-dairy-price-rout-is-nigh-says-bnz–8653.html)