Milk prices take another hit

Federated Farmers is "not hitting the panic button just yet" as milk prices tumble. Photo by...
Federated Farmers is "not hitting the panic button just yet" as milk prices tumble. Photo by Peter McIntosh
The risk of a Fonterra milk price payout in the $5 range is being suggested after yet another tumble in global dairy prices this week.

The latest GlobalDairyTrade auction was down 8.4%, with whole milk powder prices down 11.5% to their lowest since early August 2012.

Since February, prices have fallen 40% with a 20% slump over the last three auctions alone.

This week's result was weaker than economists had anticipated.

Fonterra's revised milk price forecast of $6, announced last week, looked ''optimistic at this point'', with the current prices and the level of the New Zealand dollar suggesting it would end up paying farmers in the mid-$5 range for the 2014-15 season, BNZ currency strategist Raiko Shareef said.

Last week, DairyNZ chief executive Dr Tim Mackle said $6 was a break-even payout for many dairy farmers.

Westpac senior economist Anne Boniface said this week's fall in prices created a ''clear risk'' the milk price would be below Westpac's current forecast, which was also $6, but the bank would prefer to see another auction before formally cementing in a new forecast.

There was ''still a lot of water to go under the bridge'' before the end of the season and commodity prices could be volatile. ASB, which has cut its milk price forecast from $6.20 to $5.80, warned of a milk price closer to $5 if prices stayed near their current low levels for an extended period.

Federated Farmers dairy chairman Andrew Hoggard did not expect the latest GDT result to affect the payout forecast in the near term.

The expected market recovery in the New Year would be critical, he said.

The latest decline continued a trend expected by Federated Farmers and the rural lobby organisation was ''not hitting the panic button just yet'' especially when there were signs of life in the latest auction.

''We saw more buyers and they bought more product so things are looking up, if not the price yet,'' Mr Hoggard said.

The 48,380 metric tonnes sold was the most in the 2014-15 season to date.

There were also 153 successful bidders, the most in the current season and the most since April 1.

''When you've got volume and bidders, that's a good indication prices may be close to stabilising,'' he said.

Ms Boniface said there were few clear signs of an imminent turnaround in sentiment.

For whole milk powder, buyers were only willing to pay fractionally more to secure product at later delivery dates.

Lack of Chinese demand, in particular, had been a key reason for the fall in prices.

Strong buying earlier in the year, combined with softer end demand by Chinese consumers, left Chinese wholesalers over-stocked.

Over time, that imbalance would work through the system. Stocks would be run down and a recovery in the Chinese consumer sector was anticipated.

As that happened, wholesalers would be forced to re-enter the market and prices were expected to rise.

However, just how long that process took remained a key uncertainty, Ms Boniface said.

While farmers hoping for a recovery, or, at least, stabilisation in prices, would have been disappointed by the latest out-turn, they would be heartened to see currency markets ''finally starting to sit up'' and take notice of slumping dairy prices, she said.

An ASB report yesterday pointed out it was early days for the season.

About 80% of product for this season's milk price was yet to have prices set.

''As a result, a lot can and will probably happen between now and the season's end,'' it said.

The ASB continued to expect dairy prices to stabilise and then recover by the end of 2014, but predicting the exact timing of any price rebound remained ''an inexact science''.

When asked about the impact on domestic retail milk and dairy prices, ASB chief economist Nick Tuffley said movement up and down in retail prices was generally ''pretty smooth''.

Often, when there was a big surge in global prices, the same movement was not seen in domestic retail prices, and it was a ''bit the same on the way down''.

There would be marginal impact on domestic retail prices on any given auction, he said.

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