A milk futures broker says whole milk powder buyers have been “caught napping” by a potential shortfall in the product, explaining why the price has risen 28.8 per cent at the last two global dairy auctions.
Director of OM Financial Nigel Brunel said the price hike had been “staggering” and taken everyone by surprise.
“Buyers haven’t been able to source WMP at the right price and have been concerned that New Zealand supply could be well down this season. They have been caught napping in a sleepy sideways WMP market for almost a year,” Brunel said.
As a result the buyers had climbed over each other to source WMP and lifted the price.
It was too early to predict New Zealand’s milk production this season, although the ASB has put the figure at a drop of 5 per cent. In its latest global dairy update, Fonterra said its July New Zealand milk collection had dropped by 1 per cent compared to July last year.
Its Australian collection has fallen a dramatic 22 per cent for July compared to the year before, driven by farmers choosing to dry off early after prices plummeted in May.
“New season [Australian] milk collection is expected to recover as those farmers that dried off early start calving, together with new farmer suppliers moving to Fonterra and favourable spring pasture growth conditions,” Fonterra said.
While European farmers upped their production over a year by 4 per cent, the brakes have been put on to the extent that the May increase was only 1 per cent.
Brunel said there was a vacuum of information at the moment because New Zealand’s early production had largely supplied supermarkets with fresh milk.
“The August, September and October collections are the big daddies and we don’t know what they are, but every farmer I speak to is feeling not too bad.”
He said farmers could get 20 per cent more production out of an individual cow if they treated it well with good feed.
But Brunel warned of a potential “sucker’s rally” as had happened last year when WMP prices recovered to US$2824 (NZ$3881) )in October, only to dive to US$1890 by February this year.
He recommended hedging some milk production over $5 but also adopting a wait and see policy as demand for WMP could see the Fonterra payout rising above $5 per kilogram of milksolids. At present it is $4.25 kg/ms.
Fonterra’s August update shows buyers from South-east Asia and north Asia (including China) are by far the biggest buyers of product on the dairy auction.
China has continued to buy increased quantities of global dairy products. In June imports were up 25 per cent, and imports for the 12 months to June had risen 26 per cent.
By: Gerard Hutching