Dairy futures stabilise - ending losing streak which cut prices 19%

13.03.2017

Milk futures stabilised – after a plunge of more than 10% over two sessions - offering hope that shockwaves delivered by results of a benchmark auction have washed through, paving the way for buyers to return to the market.

Whole milk powder futures for April nudged higher by 0.6% to $2,600 a tonne on New Zealand NZX exchange – ending a 12-session losing streak which had seen prices tumble by 19.2%, to a seven-month low.

More than half of that decline came after results of the latest GlobalDairyTrade auction of physical dairy product, on Tuesday, which showed whole milk powder prices falling by 12.4% from the previous event, two weeks before – a far bigger drop than expected by investors.

"Buyers, having stood back from the market, will need to buy at some point," said Tobin Gorey at Commonwealth Bank of Australia.

However, Bank of New Zealand cautioned against expectations of a rapid reversal in prices, saying that clearly, increased dairy supply on the market is having an impact.

"There doesn't seem much hope of a price recovery in the near term."

Currency 'muffling'

In fact, data on Wednesday showed Australian production dropping by 5.9% year on year in January, although this was slower than the average pace of decline for 2016-17, now running at 8.2%.

Oceania dairy prices as of March 5, and (premium over EU product)

Butter: $4,675 a tonne, (+$299 a tonne)

Cheddar: $3,838 a tonne, (+$348 a tonne)

Skim milk powder: $2,550 a tonne, (+$498 a tonne)

Whole milk powder: $3,288 a tonne, ($113 a tonne)

Source: European Commission

Indeed, Mr Gorey termed the data of "modest news value, at best - most of the industry was already expecting a decline of that magnitude", flagging too the potential for a weaker New Zealand dollar to "muffle" the signal from lower dairy prices, in terms of persuading farmers to cut production.

The currency - which because of dairy's importance to New Zealand, the top milk exporting country, is particularly exposed to the sector's welfare – was on Friday on course to end an 11-session losing streak against during which it lost 3.0% against the US dollar.

A weaker New Zealand dollar supports the price, in local terms, of assets such as milk powder which are traded internationally in US dollars.

Extra volumes

In fact, there has been market talk of the fall in New Zealand milk output in 2016-17 falling less than initially expected, speculation stoked by an announcement by Fonterra, which runs GDT, of extra volumes being sold through the auction.

Fonterra, the New Zealand dairy giant which runs GDT, last month raised its forecast for its domestic collections this season.

And it said in the run-up to Tuesday's auction that it was raising by 24,853 tonnes "its forecast offer volumes on GlobalDairyTrade events… over the next 12 months" - an announcement viewed as fuelling this week's price falls.

"Increased forecast volumes of whole milk powder and skim milk powder being offered at the auction appear to have put downward pressure on prices," the UK's Datum bureau said.

Mind the gap

However, Datum also flagged one cause for hope that the worst of the drop in NZX prices was over, given that the decline had now largely closed an unusually-large premium of New Zealand values over European Union ones.

"Such large differentials are rarely maintained for long periods," Datum said, adding that the talk of a smaller-than-expected New Zealand production "appears to have tipped the balance to close the gap".

In the skim milk powder market, the premium of Oceania product, at $2,550 a tonne, to that in the EU stood at $498 a tonne as of Sunday, according to European Commission data on Friday.

For whole milk powder, Oceania product, at $3,288 a tonne, had a premium of $113 a tonne.


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