Caution over dairy market despite milk price rise

(Agrimoney) – Investors held back from forecasting a revival in the dairy market, even after prices at GlobalDairyTrade auction failed to fall for only the second time since February.

Dairy commodities sold at GlobalDairyTrade for the same price, overall, as the previous event, two weeks ago – with an auction index marking time.

That represents only the fourth auction this year at which prices have not fallen, in a correction which has slashed values on average by 44%, fuelled by strong milk output in major producing countries at a time when China’s key importers have pulled back, and are relying on stockpiled supplies.

Nonetheless, commentators held back from trumpeting the price stabilisation as heralding better times for values, noting that price rises at the auction – based in New Zealand, the top dairy-exporting country – were focused on milk powder and on nearer-term contracts.

‘Very tight spread’

For whole milk powder, for instance, which accounts for the bulk of GlobalDairyTrade volumes, the November contract rose by 1.9% in price, while values for February 2015 delivery fell by 4.4%.

“There has been a real flattening of the price curve,” said John Lancaster, at INTL FCStone’s Dublin office.

“The spread has got very tight between November and February,” falling to some $50 a tonne from a typical premium of twice that for the later contract.

“That gives you no real sense about the direction where market thinks prices will go,” Mr Lancaster told Agrimoney.com.

Pre-2015 spree?

It was of some concern that there appeared to be no sign – yet – of a return to buying by Chinese importers, for which the start of the new year will bring a fresh quota of low-tariff imports from New Zealand, typically sparking a rush in purchases.

“You would probably expect to see some kind of evidence of Chinese purchases soon,” he said.

“The price activity would appear to indicate that there is not much Chinese buying going on at the moment.”

Milk price outlook

At Australia & New Zealand Bank, rural economist Con Williams said that the outperformance of near-term contracts was “perhaps suggesting some restocking is beginning to take place as in-market inventories are run-down”.

“But that was about as good as it got, with price declines for all the other main products”, besides skim milk powder and whole milk powder.

It remains likely that New Zealand-based Fonterra, the dairy giant which runs GlobalDairyTrade, will next week, when it unveiled annual results, cut from NZ$6.00 per kilogramme of milk solids its forecast for the price it will pay farmers in 2014-15.

Current prices suggested a level in the mid-NZ$4s per kilogramme of milk solids, below the cost of production for many farmers, he said.

Production data

Despite the weaker price outlook, 2014-15 has begun strongly for Fonterra producers, with the co-operative’s milk collections running 5% higher in the first three months of the season than a year before – albeit in months which represent a lowpoint in the output cycle.

Output in New Zealand’s North Island “has started the season well with favourable temperatures and pasture growth”, while in South Island a dry August had reduced excessive soil moisture levels, Fonterra said.

In many other major producing countries output has remained strong too, rising by 5,8% year on year in Ireland in July, and by 3.9% in the US.