International dairy prices continued to deteriorate at the latest GlobalDairyTrade auction, with the GDT price index dropping by 5.9 per cent from the last sale to record their ninth decline in a row and driving the New Zealand dollar to a fresh five-year low.
The price of whole milk powder – which is responsible for about 75 per cent of Fonterra’s farmgate milk price – fell by 10.8 per cent to US$2054 a tonne.
Fonterra’s current milk price forecast of $5.25 per kg of milksolids for 2015/16 is based on GDT prices reaching about US$3500 a tonne towards the end of this season.
The auction result saw the New Zealand dollar sink to a new five-year low of US67.30c and ANZ Bank senior foreign exchange strategist Sam Tuck said he expected the currency to remain under downward pressure.
“Clearly, there was further bad news from the auction with powder prices taking the brunt of the price declines,” he said.
NZX dairy futures pricing suggested prices might fall at this morning’s auction, but did not predict a decline of this magnitude.
“The significant increase in whole milkpowder volumes in the coming trading events will undoubtedly keep New Zealand dairy prices under pressure,” Mike McIntyre, head of derivatives at First NZ Capital, said.
“Despite the season only just being underway I believe that unless we see a very quick turnaround in sentiment that the opening milk price forecast from Fonterra is going to come under pressure,” he said.
Nigel Brunel, director financial markets at OM Financial, said the auction was a “shocker”.
“Clearly concerns about oversupply and weak demand are driving the market,” he said.
Brunel said it was hard to say whether this morning’s poor auction result was the end of the decline. “Maybe, but it’s difficult to see any rallies on the horizon, especially given our season is about to start with no letup in supply expected,” he said.
Wholemilk prices were the hardest hit, but there were also big price declines for skim milk powder, down 5.8 per cent to US$1875 a tonne, butter milk powder down 8.1 per cent to US$1878/tonne, rennet casein down 4.1 per cent to $5901/tonne and cheddar down 4.9 per cent to US$3060.
Anhydrous milk fat was the only product to gain – rising 1.6 per cent to $2855 a tonne while butter prices eased by just 0.3 per cent to US$2694 a tonne.
The average winning price at this morning’s auction was US$2276 a tonne.
Prices, after a steep decline in 2014, bounced back in February this year but have been falling ever since.
World oversupply, slack demand from the world’s biggest dairy importer – China – Russia’s import ban, the removal of dairy production quotas in Europe and cheaper feed costs have all acted to depress dairy prices.
Economists generally expect prices to stay low this year before the balance between supply and demands starts to improve next year.
Reserve Bank governor Graeme Wheeler has flagged a weak dairy sector as one of three key risks to the nation’s financial stability, saying about a quarter of farmers were operating in negative cash flow.
By Jamie Gray
Source: NZ Herald