Milk price here for rest of 2016

Hopes of a rise in global dairy prices were dashed this week with a 2.9% overall fall in the GlobalDairyTrade auction.

Futures prices had pointed to a modest overall rise in the 1%-5% range and for a 7% rise for whole milk powder (WMP), but the mainstay WMP product posted a 0.8% decrease.

The result was a good reflection of the current fragility of that part of the dairy cycle, ASB rural economist Nathan Penny said.

After a positive result last auction - the first for the year - weak commodity market sentiment, particularly from oil, knocked back prices and that dynamic was likely to continue for a while.

Over the coming months, any price lift was likely to be modest and often accompanied by a subsequent price fall, Mr Penny said.

Westpac senior economist Anne Boniface said the auction result was consistent with the bank's view WMP prices would ‘‘bump along'' near current levels until late this year.

That meant the bank remained comfortable with its $4.60 farm gate milk price for next season, implying cash flow pressures would remain intense for New Zealand dairy farmers ‘‘for some time yet''.

Last week, Fonterra reduced its farm-gate milk price forecast by 25c to $3.90 for 2015-16. Yesterday, the co-operative confirmed the permanent closure of its Kaikoura site, following the conclusion of staff consultation.

The Kaikoura plant was open for three to five months a year, and had employed 22 full-time staff, half of who wanted to be redeployed elsewhere in the company.

The decision to close the site had not been made lightly, Fonterra director New Zealand manufacturing Mark Leslie said.

While it was difficult for the people involved, the co-operative had a responsibility to its farmer shareholders, unit holders and customers to be as efficient as possible across its business, particularly given the low milk price, Mr Leslie said.

Kaikoura's cheese volumes would be split between Fonterra's Lichfield, Clandeboye, Stirling and Whareroa cheese plants, where cheese production was up to 16% more cost-effective than at Kaikoura.

Ms Boniface said it was not just New Zealand dairy farmers who were feeling the pressure of an extended period of very low dairy prices. European farmers, who had been the key source of the lift in global supply over the last year, were also feeling the pain.

There had been extensive lobbying by farmers for greater support in helping them deal with the sustained period of low prices.

The European Commission recently announced an additional range of support measures, following an earlier support package introduced in September last year, and it remained to be seen what impacts those new measures would have, she said.

European milk processors might not want to reduce production after big investments to increase processing capacity.

Furthermore, lifting the volume of skim milk powder and butter stored in intervention schemes might support prices in the short-term ‘‘but simply kicks the oversupply can down the road'', she said.

Looking at monthly, seasonally adjusted European milk production data, there were signs the pace of growth was slowing, but Ms Boniface urged caution over reading too much into that data.

The numbers were subject to revision and it was very early days yet. It provided ‘‘perhaps a glimmer of hope'' low prices were starting to lead to an adjustment in European milk supply.

But even if that proved the case, the sustained period of low prices would probably have ensured many customers had plenty of product on hand. In addition, European stockpiles would need to be worked through.

So even if the pace of growth in global dairy supplies started to slow, any rebound in prices was unlikely to be particularly rapid, she said.

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