Return to $6.50 milk price tipped

Photo supplied.
Photo supplied.
A lift back towards a $6.50 milk price for the 2015-16 season is being predicted, driven by a softer New Zealand dollar and an improvement in international prices.

Dairy prices had been notoriously volatile since 2006 and, often the bigger the plunge, the larger the bounce-back, ANZ's latest Agri Focus report said.

Fonterra has cut its forecast for the 2014-15 season from $7 to $6 and economists have hinted a price in the $5 range for the season was a possibility.

ANZ has revised its 2014-15 milk price range lower again to mid-to-high $5kg ms, given stability in milk powder prices was yet to occur, while ASB has revised its forecast to $5.80.

But while it had been ''one-way-traffic'' for prices, that could not continue indefinitely. Any further price falls should induce a lower New Zealand dollar, less interest rate rises, or both, ASB economists said.

Many of the factors pushing down prices were due to temporary boosts to supply. The production rebound from drought in New Zealand would not repeat, the New Zealand dollar and dairy prices were ''out of whack'', and a rising possibility of the gap closing over the year was seen.

The absence of Chinese demand has been one of the main catalysts for the substantial falls in GlobalDairyTrade auctions and recent reports suggested it could be two to five months before China re-entered the market.

While ANZ economists remained bullish on China's medium-term import requirements, they believed the bounce-back in prices, once inventories had been run down, would be more modest this cycle.

Most of the independent milk companies had been benchmarked off Fonterra but there had been a widening in performance at the farm gate in recent times, which seemed to be linked to foreign exchange hedging performance, different product mixes, and expansion plans, the Agri Focus report said.

All three factors seemed likely to continue to contribute towards some divergence in performance during 2014-15, especially for West Coast-based Westland Milk Products and Waikato-based Tatua, which should receive better pricing for their product mix, compared to Fonterra, the report said.

The New Zealand season could be an interesting one to watch, following the record-setting pace of 2013-14, it said.

New dairy conversions were estimated to increase the national cow herd by 1.7% which would boost production.

That assumed at least 120 new dairy farms in the South Island this spring, the majority in Canterbury, and around 25 to 30 in the North Island.

It could be more difficult to push average yields higher than the record 384kg ms per cow achieved in 2013-14.

That was 11% above trend but a lower milk price, combined with high domestic feed prices, would diminish the incentive to feed large quantities of supplement during any dry periods.

That meant Fonterra's current forecast of 2%-3% growth over the year ahead seemed ''about right''. Any dry period was likely to pressure supply and that would probably lead to prices turning up.


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