ANZ Morning Brief: Dairy price outlook

DAIRY PRICE OUTLOOK: GlobalDairyTrade prices registered their third increase in a row overnight signalling further possible upside to Fonterra’s 2012-13 milk price of $5.50 per MS. The details were good with whole milk powder (WMP) prices playing some catch-up to skim milk powder, which have been leading most other dairy markets higher. Overall, WMP powder prices increased by 2.8 percent, with rises for all contract periods. While the currency remains a bug bear for all exporters, Fonterra’s CEO Theo Spierings said in their December update that any movements in the NZD were ‘neutral’, implying Fonterra are fully hedged for the remainder of the 2012-13 season. This means the direction for farm-gate pricing will be largely driven by movements in the GlobalDairyTrade auction. While downgrades to growth forecasts by the World Bank and other signals caution on the demand side, continued lacklustre supply growth from major dairy exporters continues to be the current focus. Slow or no growth in milk production across the major export regions is expected for the next six months, which should lead to further strength in dairy prices. With year-to-date pricing around $5.30-$5.40 and last night auction translating into something close to $5.75 per MS, this suggests there could possibly be another $0.25 per MS upside to the $5.50 per MS by year-end. Suffice to say this will take the pressure off some farmer’s budgets.

DATA WRAP. Data wise, there was little from Europe overnight. The German government confirmed a 0.4% GDP forecast for 2013 vs an original estimate of 1.0% and the December Eurozone HICP was more or less in line with expectations. Most of the economic data came from the US where the December CPI data was in line with expectations (0.0% m/m, +1.7% y/y) and industrial production also came in line with the market’s forecast (+0.3% m/m). Capacity utilisation was little changed at 78.8%. The data did nothing to alter expectations towards Fed policy and hence the data had little market impact. Core inflation measures were contained, providing the Fed with scope to focus on reducing the still elevated unemployment rate by using more QE.