Dairy product prices sank in the latest GlobalDairyTrade auction, paced by cheddar and whole milk powder, reflecting a sombre outlook.
The GDT average winning prices sank 10.7 percent to US$2,082, down from US$2,276 at the previous auction two weeks ago. It was the lowest level since July 2009. Some 31,691 tonnes of product was sold, down from 33,200 tonnes of product two weeks ago.
AgriHQ dairy analyst Susan Kilsby called the auction “a disastrous result,” adding that “the NZX Futures market anticipated whole milk powder prices would fall overnight. However the market underestimated the size of the fall.”
“Farmers now face two consecutive seasons of extremely low milk prices,” Kilsby said in a note. “The majority of farmers can’t break even at such a low milk price.”
The AgriHQ 2015-16 Farmgate Milk Price decreased to $4.22 per kilogram milk solids, down 83 cents from a fortnight ago and $1.27 lower than a month ago. It compares with Fonterra’s 2015-16 milk price forecast of $5.25/kgMS.
“Farm debt levels will rise,” according to Kilsby. “Rural communities will suffer as farmers reduce spending to the bare essentials.”
Cheddar plunged 13.9 percent to US$2,613, while whole milk powder sank 13.1 percent to US$1,848 a tonne. Anhydrous milk fat dropped 10.6 percent to US$2,621 a tonne, while skim milk powder shed 10.1 percent to US$1,702 a tonne.
Butter slid 9.5 percent to US$2,460 a tonne, while rennet casein fell 8.0 percent to US$5,430 a tonne. Butter milk powder declined 4.4 percent to US$1,794 a tonne.
Bucking the trend, lactose rose 1.9 percent to US$549 a tonne.
The New Zealand dollar last traded at 66.04 US cents at about 2:20pm in New York, compared with 67.00 US cents at 5pm in Wellington the previous day. The currency was trading above 88 US cents a year ago.
There were 130 winning bidders out of 135 participating bidders at the 10-round auction. The number of qualified bidders dropped to 628, down from 652 at the last auction.
Previously Businessdesk reported:
The price for New Zealand’s key dairy export, whole milk powder, may drop further at next week’s GlobalDairyTrade auction as the country starts to ramp up production amid a global glut in milk supply.
The current July whole milk powder futures contract last traded on the NZX at US$1,910 a tonne. Because the price is an average of two fortnightly auctions and the contract was priced at US$2,000 a tonne in last week’s auction, traders see a decline of 10 percent to US$1,800 a tonne next week. The longer-dated whole milk powder futures contracts are all trading at a discount to the GDT, suggesting traders expect prices to fall.
Dairy prices have remained lower for longer amid higher global supplies in New Zealand, Europe and the US, weak demand in China and an import ban in Russia. New Zealand production is rising, heading into the country’s peak supply period in October, while US farmers are reportedly dumping milk into holes used for livestock manure and the European Union has ended its quota limits.
“It’s pretty negative, there’s a lot of selling in the futures and there’s not much buying – this market looks completely stuffed,” said OMF financial markets director Nigel Brunel. “Whole milk is looking to be down another thumper, and then it gets worse because the volume starts to step up again as we get into August. There is just a gap between what is being produced and what is being consumed.”
Weaker dairy prices are weighing on New Zealand’s economy, cited as a reason for decade-low rural confidence levels, deteriorating business confidence and are firmly on the radar of the Reserve Bank which has begun cutting interest rates to bolster slowing growth.
“It’s going to put more pressure on the Reserve Bank to ease,” Brunel said.
Traders are pricing in a 96 percent chance the Reserve Bank will cut the benchmark interest rate at this month’s meeting, according to the Overnight Index Swap curve. Some economists are forecasting three further interest rate cuts this year, which would fully reverse the central bank’s tightening in policy last year when it raised interest rates by a percentage point.
The New Zealand dollar touched a fresh five-year low of 66.19 US cents overnight, with traders citing the impact of weaker commodity prices.
“The kiwi is under pressure,” said Brunel. “It has a real trickle down affect on other parts of the economy.”
Weak dairy prices have prompted analysts to pull back their expectations for Fonterra Cooperative Group’s payout to farmers this season, with most forecasts now sitting below the dairy exporter’s $5.25 per kilogram of milk solids. Market expectations range between $4.50/kgMS and $5.40/kgMS.
Previously Business Desk reported:
The price for New Zealand’s key dairy export, whole milk powder, is set to decline further at tonight’s GlobalDairyTrade auction as dairy companies head into the new season and ramp up production.
The current July whole milk powder futures contract last traded on the NZX at US$2,200 a tonne, 3.7 percent below the winning price of US$2,285/tonne at the last GDT on June 16. Traders also pulled back their expectations for longer-dated contracts with the November futures contract priced at US$2,310/tonne, down 1.9 percent compared to the last auction.
Fonterra Cooperative Group, which accounts for the bulk of whole milk powder sold on the GDT, will increase its volume on the platform to 15,750 tonnes, from 10,000 tonnes at the last auction as production increases in the lead-up to peak supply in October.
Weaker dairy prices are weighing on New Zealand’s economy, cited as a reason for decade-low rural confidence levels, weaker business confidence and are firmly on the radar of the Reserve Bank which has begun cutting interest rates to bolster slowing growth. Dairy prices have remained lower for longer amid higher global supplies in New Zealand, Europe and the US and weak demand from key markets in China and Russia.
“The expectations that prices will rise seems to be getting continually delayed,” said AgriHQ senior dairy analyst Susan Kilsby. “It’s still relatively pessimistic at the moment. Prices at the current levels are certainly not sustainable.”
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 this season and were relying on short-term loans to cover their working capital. If prices didn’t recover, that would put stress on parts of the sector, which in turn could taint banks’ loan books.
Whole milk powder futures were previously trading at a premium to GDT, signalling expectations for a rebound in pricing from low levels, but were now trading at a discount, said OMF financial markets director Nigel Brunel, who expects prices to fall between 5 and 10 percent at tonight’s auction.
“Price increases are more likely to come from a supply correction rather than demand correction at this stage just because the amount of cheap capital in the world has seen a whole lot of additional supply come on line,” said First NZ Capital head of derivatives Mike McIntyre.
Still, AgriHQ’s Kilsby said there appeared to be little on the horizon to stimulate prices in the short term.
“They will increase again at some point but at the moment the buyers are reasonably well covered so there is nothing to stimulate demand in the short term,” she said. “The long-term outlook for the industry is still positive but it is going to take the bulk of the current 2015/16 season to recover.”