NZ: The cow jumps - BNZ

Doug Steel, Senior Economist at BNZ, notes that the NZ dairy prices zipped 12.7% higher, on average, at the latest GDT auction and there were great expectations heading into this event and even those were surpassed. Comprehensively.

Key Quotes

“This was an extremely strong result.

Sure the indicators were pointing sharply higher but it is always better to see it in physical pricing. The latter is what drives milk price and there is now clear and present upside to Fonterra’s forecast of $4.25 per kilogram of milksolids. If dairy product prices maintain these levels, and the NZD doesn’t push materially higher, then the milk price would likely be over $5.

To date, international prices are tracking closer to the upside scenario we outlined in our note back in June and above our central view. On the back of the strengthening international prices we have lifted our 2016/17 milk price forecast to $5.30 from $4.60. As usual, at this early stage of the season, we continue to emphasise the wide error bounds around any point forecast.

Still something in the ballpark of $5.30 would be above current breakeven estimates for the current season on a headline basis. While cashflow will not recover as quickly as the headline, it is important to see improvement is in the pipeline.

We sense this auction result has a bit of panic buying in it. Unsatisfied bidders had been a bit elevated of late (and lifted further at this event). The 6.6% price rise at the previous auction likely generated some fear of missing out at this event. This adds to price supportive developments on the supply side like falling EU milk production and expected production declines in Australia and NZ this season. Meanwhile, Chinese import demand has been firmer in 2016 and oil prices have bounced off recent lows.

We suspect the market is now factoring in a sizeable decline in NZ milk production. This no doubt added to the massive 18.9% lift in wholemilk powder prices to an average of US$2,695/T. Our current forecasts have a relatively mild production decline of 2%. As usual, the weather will be crucial (the recent snow and too much rain in parts have been unhelpful, but it’s early days). Production may be lower than we anticipate and thus prices firmer than we forecast. All eyes now on the early season NZ milk flow. It is one of many moving parts.

Large price gains were widespread at this auction with butter +14.1%, cheese +8.9%, and AMF +8.4%. The 3% gain in skimmilk powder was relatively soft. The weaker SMP performance is likely to reflect the influence of the very large EU stockpile of that product. We also note that international grain prices remain low and will be some sort of restraint on dairy prices over the coming year or two. So it might not quite be all go on the indicator front for dairy prices, but there has been a clear jump off the lows and that’s encouraging.”