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Australian Analyst: Dairy Price Nosedive Near End
August 18, 2015

The slump in dairy prices looks to be bottoming out, with the El Nino summer dry risk tipped to be New Zealand farmers’ friend for a price recovery, say analysts.

However, big questions remain over when prices will recover, although longer term market prospects are thought to be in dairying’s favour.

Melbourne analyst Craig Ferguson, of Antipodean Capital Management, who warned farmers early this year that a 50-60 per cent market price fall was coming, said prices are likely to stay soft until the end of this year, but his sense is that Fonterra’s $3.85a kg of milksolids forecast for its new Zealand suppliers should be the low point, or close to it.

Prices have fallen 47 per cent since his March prediction.

Mr Ferguson said it was possible Fonterra’s forecast milk price could still take a hit, but only after the next 13 or so weeks of heavy seasonal production would the extent of any extra price decline be known.

But medium-term, with overseas dairy stocks having reportedly fallen substantially, revenues being so far below cost and with the El Nino risk perhaps more apparent by the end of the year when milk supply has eased off, stability should come for dairy prices from current or slightly lower levels, he said.

A severe El Nino event by the end of this year would sharply reduce dairy supply and propel a faster price rebound than many think, Mr Ferguson said.

ANZ economist Con Williams also believes the price nosedive has run out of steam.

“For me it looks like the bottom,” he said

“In terms of whether we improve and how quickly, when the catalyst does come for improvement it is likely to take us to US$2000-$2200 per tonne pretty quickly, I would anticipate.”

Mr Williams said there was speculation China would start buying more dairy product, with big companies in that country said to be buying more aggressively in the past month.

New Zealand’s dairy export staple, whole milk powder, fell 10.3 per cent to US1590 per tonne at the last GDT auction, while skim milk powder finished at US$1419 per tonne.

But the price would need to go materially higher than US$2000 over the next nine months for Fonterra to be able to pay farmers its latest forecast milk price of $3.85, Mr Williams said.

ANZ’s forecast is for $3.50.

Fonterra may have helped rein in further market price falls by announcing last week it would significantly reduce the product it offered on the GDT for the next 12 months.

The volumes forecast for New Zealand products had been cut by 56,045 tonnes, with a nearly 63,000 tonne decrease due in the next three months. Fonterra said 6885 tonnes of planned volume would be added back later in the year in anticipation of changing market conditions.

The company was also to shift volumes away from base whole milk powder to other products such as value-added ingredients, consumer and food service products.

Fonterra managing director global ingredients Kelvin Wickham said Fonterra was now selling about 70 per cent of its total product through channels other than GDT.

The reduction reflected Fonterra’s expectation that its farmers would reduce milk supply by at least 2 per cent this season, he said.

Mr Ferguson said crucially three key factors were in dairying’s favour for a recovery.

The cost of production was now so far above prices that supply could dry up more quickly than other bulk commodities such as oil or iron ore, where top-tier producer cost of production was still at, or below, current spot prices. This meant dairy might find a price floor now, he said.

Second, dairy prices were far more weather-affected than bulk mineral or energy commodities. Prices would likely be supported by the expected El Nino event.

Third, the 2015-2016 Fonterra payout might be near the low point for prices, Mr Ferguson said.

“Why so? For all the (previous) reasons, however also because the economic impact of the dairy price fall is yet to be felt,” he said.

That meant the economic impact on New Zealand stocks, bond yields, cash rate and the Kiwi dollar had yet to be truly felt, he said.

“If, as we expect, dairy prices stay at current levels or lower over the next seven auctions, then the economic impact will start to be felt via an even lower Fonterra payout figure, and the New Zealand economy will slide closer to recession.

“If that is the case the OCR (official cash rate) will keep falling and so will the New Zealand dollar.”

Mr Ferguson said depending on dairy companies’ currency hedge levels, the dollar could fall towards US50c, which while dairy prices tried to stabilise, could mean a higher Fonterra 2016-2017 season payout than the current year.

A $400 lift in dairy futures prices for whole milk powder for the end of the year since the last GDT auction has also fueled hopes the price slump is nearly over.

By Andrea Fox
Source: The Australian Dairyfarmer


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