The larger-than-expected retreat in milk prices at GlobalDairyTrade may not signal the start of a downward correction in prices – but it could herald a more cautious phase, Bank of New Zealand said.
A 3% drop in prices on Tuesday at GlobalDairyTrade, the physical auction run by New Zealand dairy giant Fonterra, “has injected some caution back into the dairy market”, Bank of New Zealand said.
Whole milk powder futures for October slipped 1.1% to $2,750 a tonne overnight on New Zealand’s NZX exchange, their lowest since mid-August, and extending to 12% a decline in prices from a high two weeks ago.
And the bank flagged “fears” that the dairy retreat “is the start of a bigger unwind of the strong gains”, which have lifted GlobalDairyTrade prices by 38% in six months.
‘Potential for further easing’
However, the bank said that while “there is potential for some further easing in the near term, we wouldn’t jump to conclusions”, underlining that Tuesday’s auction came amid the golden week holiday in China, a key dairy importer.
Furthermore, there is reason for dairy investors to step back to await confirmation that the milk production curtailments, which have fuelled recent price rises, are indeed occurring.
“The previous price gains seemed predicated on expectations of further declines in milk supply in key areas around the world,” Bank of New Zealand analyst Doug Steel said.
“At some point it would seem appropriate for the market to take a breather to assess the validity, or otherwise, of that premise.”
Dairy prices vs grains
In fact, the bank forecast a decline of 2% in milk output in New Zealand, the top dairy exporting country, over 2016-17, a little more optimistic than Fonterra’s forecast of a 3% drop.
And it underlined the support to output prospects provided by weak world grain prices, in curtailing the price to milk producers of livestock feed.
“Dairy prices still look stretched relative to grains and this has been, and remains, a key reason why we have remained cautious on dairy prices,” Mr Steel said.
“Weak international grain prices are one reason to be a little cautious on how far the likes of dairy prices might extend over the coming year or two, as lower feed costs influence supply decisions for many northern hemisphere.”
‘Market needs proof’
Nonetheless, Bank of New Zealand stuck with a forecast of farmgate milk prices averaging NZ$5.30 per kilogramme of milk solids in 2016-17 in New Zealand, a little higher than the NZ$5.25 forecast by Fonterra, which processes the vast majority of domestic supplies.
Separately, Tobin Gorey, at Commonwealth Bank of Australia, also remained sanguine over prices, while stressing the importance to investors of milk output data.
“We find the volatility in [GlobalDairyTrade] prices a little worrisome but not enough to shake our view that dairy prices will finish this season higher,” Mr Gorey said.
“We expect less milk production around the world this year to help prices rise.
“The issue now is that the market will not rally a lot more on a promise – it needs proof. That can only accumulate with time.”
(Source – http://www.agrimoney.com/news/dairy-price-retreat-cause-for-caution-but-not-panic–10001.html)