Global dairy prices jumped for a third straight auction on dwindling milk supply, prompting some economists to revise up forecasts for Fonterra Cooperative Group’s payout to New Zealand farmers.
ASB Bank and ANZ Bank New Zealand both lifted their forecasts for the season ending May 31 by 50 NZ cents (32 cents) after the average price for whole milk powder surged 20.6 percent in GlobalDairyTrade’s auction overnight. It was the third straight double-digit increase in the fortnightly sales. ASB now sees a payout of NZ$5 per kilogram of milksolids and ANZ forecasts a range of NZ$4.25 to NZ$4.50.
Dairy prices fell to a 12-year low in August amid a global glut and waning demand from China, curbing New Zealand economic growth and prompting the central bank to cut interest rates. Prices are now rising on reduced milk production, with New Zealand farmers culling herds, and as China re-enters the market, economists said.
“The main catalyst for further improvement would appear to be China’s higher seasonal requirements, slowing European supply in some key regions and building expectations of lower New Zealand supply in 2015/16,” said Con Williams, rural economist at ANZ in Wellington. “The market continues to price in some risk of an El Nino impact later in the season with the milk powder curve now upward sloping.”
Fonterra, the world’s biggest dairy exporter, has reduced the amount of product it offers through the GDT auction citing an expected decline in New Zealand milk supply of as much as 3 percent this season. ASB predicts a 5 percent drop from last season, which it predicts will drive prices higher.
“We expect prices to kick on over the rest of the season as production weakens materially,” ASB economist Nathan Penny said in an e-mailed note. “The reductions to Fonterra’s auction volumes are to a degree a distracting from this message: production is shaping up to be very weak this season.”
The average price for whole milk powder rose to $2,495 a metric ton, GDT said, up from a low of $1,590 on Aug. 4. That compares with a high of $5,245 reached in April 2013. GDT’s overall price index for all dairy products jumped 16.5 percent in the latest auction.