Warning of need to remain vigilant

Andrew Hoggard
Andrew Hoggard
While a lift in dairy prices suggests there might be ''light at the end of the tunnel'', the industry needs to remain vigilant, Federated Farmers has cautioned.

Prices finally rebounded in this week's GlobalDairyTrade auction, with the 14.8% increase ending a 10-auction falling streak.

It was good news for farmers who have had a horror few months, including the latest downwards revision by Fonterra of its farmgate milk price for 2015-16 to $3.85.

What the industry needed now was for the improved prices to continue and hold, Federated Farmers dairy chairman Andrew Hoggard said.

In the meantime, the rural lobby organisation would continue to work with farmers, sharemilkers and other key industry players to encourage them to re-examine their budgets and business plans, and obtain the support of banks, farm advisers and other experts in making decisions, Mr Hoggard said.

Whole milk powder prices jumped 19.1%, although its volume was 36% lower than at the previous auction. Skim milk powder was up 8.5% and anhydrous milk fat surged 26.6%.

Westpac senior market strategist Imre Speizer said the price change direction was unsurprising and widely expected given Fonterra last week announced a significant reduction in this auction's volume.

The price rise was larger than most had expected and the futures market was expecting another strong result at the next auction on September 1. Auction participation statistics were also healthy.

But Mr Speizer was also loth to get ''too carried away'' with one observation against a trend decline in prices which was two years old.

''The bounces were large but have merely returned prices to levels prevailing in early August. Prices are still 39% below their March level.

''There's also the vexing question of how much Fonterra's auction volume reduction and changes in product composition contributed to the result,'' he said.

ASB rural economist Nathan Penny said the ''circuit breaker'' that dairy markets had long needed was now in hand.

Market focus had shifted from the global glut to a potential fall in New Zealand production this season.

The bank expected prices to recover much of the lost ground of the preceding three auctions, but

further lifts became more difficult.

For prices to return to more normal or sustainable levels within 12 months, three necessary conditions were needed - an improvement in dairy market sentiment, which had already occurred, a drop or material slowing in New Zealand supply, which had partially happened, and a drop or material slowing in global dairy supply, Mr Penny said.

This week's lift reinforced ASB's milk price forecast of $4.50 by season end.

Further strength was expected over the next couple of auctions, before starting ''the long grind'' higher over the remainder of the season and into next.

Last week, Rabobank released a report on the dairy industry and co-author Michael Harvey, a senior dairy analyst, said it showed ''a fistful of reasons'' to expect the medium-term outlook to hold better for New Zealand.

While dairy prices were unlikely to be much improved over the next six months, the factors that would trigger a turnaround were now in place.

They included milk price reductions in China starting to choke off domestic production growth, lower New Zealand production, and reduced supply growth from the United States and European Union due to the collapse of international commodity prices plus accelerated dairy consumption growth depleting accumulated stocks.

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