Industry over milk price slump, analyst says

The GlobalDairyTrade Price Index rose by 1.7 percent (Getty)
The GlobalDairyTrade Price Index rose by 1.7 percent (Getty)

Despite a fairly flat overall result at the GlobalDairyTrade auction overnight, AgriHQ analyst Nick Handley says "the slump is behind us and we're into the recovery phase".

The GlobalDairyTrade Price Index rose by 1.7 percent, to an average price of US$2975 per metric tonne.

But whole milk powder slipped by 0.2 percent to an average price of US$2782.

Skim milk powder prices rose 3 percent to US$2293.

The modest improvement in prices today follows sharp increases at the previous two auctions.

The GDT Index rose by 7.7 percent two weeks ago and by 12.7 percent at the previous auction in mid-August.

Whole milk powder rose by 3.7 percent two weeks ago, and by 18.9 percent in mid-August.

Notably, whole milk powder fell well short of AgriHQ's prediction of a 12 percent lift.

"The GDT is a volatile market so discrepancies are not unheard of," says Mr Handley.

"Yes, there was some disappointment that the result wasn't stronger at the auction, but a flat result is still a good one, given how much prices have lifted in the last few months.

"The result suggests that, combined with slowing European production, recovery is pretty well supported."

So why is production slowing in Europe? Lower prices are flowing through and resulting in slowing milk production at the farm gate. 

"The market is doing its thing", says Mr Handley.

"A scheme announced in Europe will subsidise farmers in reducing milk production further."

Mr Handley says there's upward momentum in whole milk and he expects that trend to continue.

For farmers this is part of the usual cycle, but it's been a "particularly dramatic, tough couple of years".

A continuing challenge is the strong New Zealand dollar. 

"As long as it sits in the mid-70s [against the USD], it'll chew into the gains we've been seeing."

AgriHQ has forecast a payout of $5.70 for the 2016/2017 June-May season, but that will be updated tomorrow and "could edge above $6".

The result has also seen Fonterra increase its forecast farmgate milk price by 50 cents.

It is forecasting a payment of $5.25 per kilogram of milk solids.

Fonterra is also forecasting earnings per share for the current financial year between 50 and 60 cents. That would mean a total payout available to farmers in the current season of between $5.75 to $5.85, before retentions.

Dairy New Zealand estimates the average break-even point this season is $5.05.

Fonterra chairman John Wilson said that since the co-operative last reviewed its forecasts in August, the "global milk supply has continued to reduce and demand has remained stable".

"Milk production in key dairying regions globally is reducing in response to low milk prices. Milk production in the EU for 2016 is beginning to flatten out and our New Zealand milk collection is currently more than 3 percent lower than last season."

But Fonterra says the high New Zealand dollar remains a problem.

Mr Wilson said "while we have seen some improvement in GDT auction prices recently, the high New Zealand dollar-US dollar exchange rate is offsetting some of these gains".

The Kiwi was sitting at 73.12 US cents before the update was released.

Fonterra's announcement came after prices rose again at the latest global dairy auction.


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