Milk prices surge at latest auction

Whole milk powder prices have fallen sharply since March.
Whole milk powder prices have fallen sharply since March.
Wholemilk powder prices, which play a big part in the formation of Fonterra's farmgate milk price, rallied by 19.1% to US$1856 a tonne at this morning's GlobalDairyTrade auction, raising hopes that prices may finally have turned.

Overall, the GDT price index gained by 14.8%. The average winning price at the auction was US$1974 a tonne, compared with US$1815 a tonne at the last sale earlier in August.

Whole milk powder prices have fallen sharply since March, when they reached US$3272 a tonne, but futures market pricing in recent days suggested an improvement was in store.

Further out along the price curve, whole milk prices for contract periods from November through to February 2016 all posted double-digit percentage price gains.

Skim milk prices, which have also savagely marked down in recent sales, gained by 8.5% to US1521 a tonne.

New Zealand dairy giant Fonterra this month cut its farmgate milk price to $3.85 per kilogram of milksolids, from a previous forecast of $5.25, and added a 50 cents per kilogram support package in the form of a soft loan. DairyNZ estimates the average breakeven price to be $5.40 a kilogram.

This morning's auction follows a rally on the NZX dairy futures market, which had been firming in anticipation of less product being put up for sale by Fonterra on the GDT platform.

New Zealand and world overproduction has played a role in sharply weaker prices, but Fonterra has said it expects milk production to fall by 2% this season, following a record 1614 million kg of milksolids collected in the year to May 31.

Eric Meyer, president of Chicago-based risk management, advisory and brokerage firm HighGroundDairy, said it looked like prices had finally bottomed but that he did not expect prices to race higher from here.

"I'm not sure if this is the turning point because supply and demand has not changed. On the demand side, there is still concern about China and the impact that devaluation may have there," he said.

Mr Meyer said the gain appeared to be more about Fonterra's decision to take product off the GDT platform than any other influence and doubted that the market was about the make a sharp run higher from here.

"My feeling is that we need to see less milk production to provide enough support for the market," he said. "We have not got to a point of supply-demand balance yet. This market has not turned around - it is still a bear market."

Nigel Brunel, director of financial markets at OM Financial, said the market by have seen its price lows for now, but that much would depend on local production in the current season.

Among other movements at the auction, anhydrous milk fat prices shot up by 26.6% to an average price of US$2724 a tonne and butter rose by 10.8% to US2541 a tonne.

Butter milk powder prices firmed by 13.8% to US$1400 a tonne and cheddar gained by 4.4% to US$2778 a tonne. Rennet casein firmed by 3.0%  to US$5441 per tonne. Lactose prices dropped by 7.8% to US$502 a tonne.

Rural lending specialist Rabobank said this week that while the sector was experiencing a severe cyclical downturn, a "substantial" improvement in prices was still expected by mid-2016.

- By Jamie Gray of the New Zealand Herald

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