Futures prices signal lift in next week's GlobalDairyTrade auction
The price for New Zealand's key dairy product, whole milk powder, looks set for a second strong uplift at the GlobalDairyTrade auction next week, according to traders who are pricing in an increase on the NZX futures market.
Whole milk powder futures contracts for August through December are all trading at a premium to their previous GDT level, implying prices will gain. The average whole milk powder price rallied 9.9 percent to US$2,265 at the last fortnightly auction and premiums on the futures market suggest a similar gain is likely at the upcoming auction in the US on Aug. 16, according to brokerage OMF.
"The futures are certainly pointing to another similar result," said Nigel Brunel, financial markets director at OMF in Auckland. "There's a reasonable amount of upside being built into the market."
The September whole milk powder contract on the NZX futures market last traded at US$2,560 a tonne, up from US$2,245 a tonne in the equivalent contract at the last GDT. The October futures contract traded at US$2,670 a tonne, a premium to US$2,300 on the GDT; the November contract traded at US$2,720 a tonne from US$2,300 on GDT; and the December contract was at US$2,700 a tonne from US$2,350 on GDT.
Dairy prices have been depressed for longer than expected due a global glut and weak demand, and New Zealand's dominant milk processor Fonterra Cooperative Group is expecting to pay its farmer suppliers below the level needed to break even for a third season in a row. However, Fonterra said this month that it expects global milk supply and demand to come into balance over the course of this season as farmers globally produce less milk in response to lower prices. It's forecasting a 3 percent drop in its New Zealand milk collection this season.
The Reserve Bank yesterday said it expects global production will "remain structurally higher than previously thought" which will weigh on prices over the medium term. The central bank lowered its medium-term assumption for whole milk powder prices to US$3,000 per tonne from US$3,300 a tonne.
New Zealand farmers sent a record number of cows to slaughter in the latest quarter, underpinning the forecasts for a decline in milk volumes this season. A total of 520,705 cows were killed in the three months through June, the highest quarterly slaughter rate since Statistics New Zealand began collecting the data in 1981.
In the year through June 2015, the national dairy herd declined 3.2 percent to 6.5 million, the first annual decline in a decade, and ASB Bank rural economist Nathan Penny says the latest slaughter data suggests the herd fell a further 5 percent this year, which he says would be the sharpest fall on record.
Penny said cow numbers tend to rebound following a drop and the sharp decline for a second season is unprecedented.
"We have seen the cow kill last year lift strongly and we have seen another lift this year," Penny said. "This time around we are getting two seasons in a row where cow numbers are falling and they are falling significantly."
While the initial cull likely impacted the least productive cows, the further decline for a second year may have seen farmers killing cows they would have retained in other seasons, he said.
OMF's Brunel noted the recent winter cold snap in New Zealand was likely to impact calving, grass growth and milk production, which was feeding bullish sentiment on the outlook for milk prices.
Click the hamburger symbol top right of our homepage to access the Rich List 2016 and other sections.