Milk futures stabilised – after a plunge of more than 10% over
two sessions - offering hope that shockwaves delivered by results of a
benchmark auction have washed through, paving the way for buyers to return to
Whole milk powder futures for April nudged higher by 0.6% to
$2,600 a tonne on New Zealand NZX exchange – ending a 12-session losing streak
which had seen prices tumble by 19.2%, to a seven-month low.
More than half of that decline came after results of the latest
GlobalDairyTrade auction of physical dairy product, on Tuesday, which showed
whole milk powder prices falling by 12.4% from the previous event, two weeks
before – a far bigger drop than expected by investors.
"Buyers, having stood back from the market, will need to buy
at some point," said Tobin Gorey at Commonwealth Bank of Australia.
However, Bank of New Zealand cautioned against expectations of
a rapid reversal in prices, saying that clearly, increased dairy supply on the
market is having an impact.
"There doesn't seem much hope of a price recovery in the
In fact, data on Wednesday showed Australian production dropping
by 5.9% year on year in January, although this was slower than the average pace
of decline for 2016-17, now running at 8.2%.
Oceania dairy prices as of March 5, and (premium over EU product)
Butter: $4,675 a tonne, (+$299 a tonne)
Cheddar: $3,838 a tonne, (+$348 a tonne)
Skim milk powder: $2,550 a tonne, (+$498 a tonne)
Whole milk powder: $3,288 a tonne, ($113 a tonne)
Source: European Commission
Indeed, Mr Gorey termed the data of "modest news value, at
best - most of the industry was already expecting a decline of that magnitude",
flagging too the potential for a weaker New Zealand dollar to "muffle" the
signal from lower dairy prices, in terms of persuading farmers to cut
The currency - which because of dairy's importance to New
Zealand, the top milk exporting country, is particularly exposed to the sector's
welfare – was on Friday on course to end an 11-session losing streak against during
which it lost 3.0% against the US dollar.
A weaker New Zealand dollar supports the price, in local
terms, of assets such as milk powder which are traded internationally in US
In fact, there has been market talk of the fall in New
Zealand milk output in 2016-17 falling less than initially expected,
speculation stoked by an announcement by Fonterra, which runs GDT, of extra
volumes being sold through the auction.
Fonterra, the New Zealand dairy giant which runs GDT, last month raised its forecast for its domestic collections this season.
And it said in the run-up to Tuesday's
auction that it was raising by 24,853 tonnes "its forecast offer volumes on GlobalDairyTrade
events… over the next 12 months" - an announcement viewed as fuelling this week's
"Increased forecast volumes of whole milk powder and skim milk
powder being offered at the auction appear to have put downward pressure on
prices," the UK's DairyCo bureau said.
Mind the gap
However, DairyCo also flagged one cause for hope that the worst
of the drop in NZX prices was over, given that the decline had now largely
closed an unusually-large premium of New Zealand values over European Union
"Such large differentials are rarely maintained for long
periods," Datum said, adding that the talk of a smaller-than-expected New
Zealand production "appears to have tipped the balance to close the gap".
In the skim milk powder market, the premium of Oceania product,
at $2,550 a tonne, to that in the EU stood at $498 a tonne as of Sunday, according
to European Commission data on Friday.
For whole milk powder, Oceania product, at $3,288 a tonne, had
a premium of $113 a tonne.