Wednesday, December 6, 2023

ASB slashes forecast following ‘terrible’ GDT

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Overall prices reach their lowest levels since 2018.
Skim milk powder fell 5.2% to $2333 a tonne on the latest Global Dairy Trade auction, as did butterfat, with the butter index dropping 3% to US$4539/t.
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ASB has lowered its dairy forecast to $6.60/kg MS in the wake of the latest Global Dairy Trade auction, which saw overall prices reach their lowest levels since 2018.

The auction on August 16 saw dairy prices slump by 7.4%, led by an almost 11% nosedive in whole milk powder (WMP) to US$2548 a tonne, its lowest point since 2016.

Skim milk powder (SMP) fell 5.2% to $2333 a tonne, as did butterfat, with the butter index dropping 3% to US$4539/t. Anhydrous milk fat (AMF) took 5.3% knock, falling to US$4452/t.

The only positive to come out of the fortnightly auction was the cheese price, which rose by almost 6% to USD4127/t.

ASB economist Nathaniel Keall described the result as “terrible”.

“We’ve been among the most bearish forecasters this season, but dairy prices have fallen further and faster than even we had anticipated. 

“While we’ve long had a bearish view relative to the rest of the market, our new forecast is 40c below the $7 figure we were anticipating at the beginning of the year.”

It would be prudent for farmers to budget on a milk price in the lower half of Fonterra’s present guidance range of $6.25-$7.75/kg, he said.

RaboResearch senior agricultural analyst Emma Higgins said the immediate challenge in New Zealand is that the industry is coming into its seasonal production curve – so that more dairy is being added to the GDT in the face of weak demand. 

“China’s rebalancing of excess supply and inventory over weak demand will result in less GDT demand tension and therefore lower prices.”

Milk supply is tightening up in the northern hemisphere. United States June milk production was flat versus the year before, bringing an end to an 11-month year-on-year growth streak. The decline was a key driver in moving total US output to flat in June. 

Meanwhile, European Union June milk flows for the region were barely ahead by just 0.2% year on year, with production in some parts hampered by hot weather.

Higgins emphasised that NZ milk production is what the market will be watching for. Influenced by weather events, production for June was lower by 1.8% YOY – but there are small volumes at this time of the year.

“Weather has been a mixed bag for July, with sodden soil still plaguing some areas. August production is likely to be higher YOY – if only based on weak comparables from last year,” she said.

“However, still half a month to go and the past few years have shown we can’t get complacent at this point when it comes to fickle weather … lucky there is still a lot of runway ahead for the current 2023-24 season.”

Westpac senior agri economist Nathan Penny said the catalyst for the price slump was a sudden increase in auction volumes on offer. 

Before the auction Fonterra announced an 11.1% increase in WMP volumes along with announcing a 5.6% increase in auction volumes over the next 12 months.

“It’s unclear what’s driven the sudden increase in volumes. Fonterra stated rather unhelpfully that ‘these changes are the result of movements in market demand’.

“We speculate that buyers see an opportunity to purchase at lower prices on the auction platform. To this end, these buyers may have signalled to Fonterra that they no longer want to buy direct from Fonterra on a contracted basis. As a result, Fonterra has had to shift this product that it would have sold on contract to the auction platform.”

 Supporting this was increase in the number of buyers at this auction, notably from North Asia, he said.

Penny said while he had expected a short-term fall in prices after the bank revised its forecast to $7.50/kg MS earlier this month, the fall in the latest auction was larger than expected.
“And while it is difficult to read too much into one auction result, it does point to prices potentially falling by more than our updated forecast suggests.

“We continue to note that it’s still early days in the season and a wide range of milk prices are possible.”

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