Dairy prices get 2015 off to flying start at key auction

(Agrimoney) – Dairy commodities, having proved one of the worst performers of 2014, got 2015 off to a winning start at GlobalDairyTrade, where prices rose at their quickest in more than a year, lifting hopes of an end to the market rout.

Prices at the first auction of the year rose by 3.6%, as measured by the GlobalDairyTrade index, the biggest increase since December 2013.

It also represented the first time in 11 months that prices have risen at two successive auctions, and reflected gains in all products, albeit with smaller volumes sold – at 33,669 tonnes, the lowest in 18 months.

Nonetheless, the performance raised expectations that dairy prices, having halved during 2014, may at least have found a floor.

‘There is value’

“It is too early to say this is the start of a sustained increase in prices,” Kyle Schrad, senior risk management consultant at INTL FCStone in Chicago, told Agrimoney.com.

“But to say it is sustainable in terms of having found a bit of a bottom, from which prices may rise, I think that’s a possibility.”

From buyers’ perspective, “prices have reached a level where there is value”, Mr Schrad said, noting also some ideas of milk production slowdowns.

Fonterra, the Auckland-based dairy giant which runs GlobalDairyTrade, last month cut its forecast for milk output in New Zealand, the top milk-exporting country, citing continued declines in farmgate prices.

Fonterra also last month cut its forecast for its milk price to farmers to the lowest in eight years.

Delayed market signal

Indeed, given the lag between movements in dairy commodity prices, and when those values reach producers, it is only now that farmers are yet to feel the worst of the market downturn, implying that market signal to reduce production has yet to reach full volume.

In the UK, for instance, both Dairy Crest and First Milk, two of the big three processors, have announced price cuts for milk from February 1.

Furthermore, current farmgate milk prices are also “being boosted by positive seasonality payments”, the DairyCo bureau said.

“As we head towards the spring and seasonality payments are removed or change to penalties, the full effect of milk price cuts already announced will be felt on cash flows.”

Flying fats

At the latest GlobalDairyTrade auction, the biggest rises were in prices of milk fats, with whole milk powder, by far the biggest product by volume, showing a relatively small increase, of 1.6% – widening its unusual discount to skim milk powder, which appreciated by 2.8%.

Prices of anhydrous milk fat, however, rose by 6.8% – taking to 44% their recovery from an early-October low.

Butter prices soared by 13.2%, taking to 42% their gains from a low reached two months ago.