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New Zealand milk production worries bolster milk powder futures

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Whole milk powder futures held their ground, amid mixed ideas on New Zealand milk production at its seasonal high, and despite a sluggish performance by physical prices at GlobalDairyTrade.

 

Most whole milk powder (WMP) futures closed unchanged on the NZX exchange on Wednesday, with the November lot an exception in falling by $50 a tonne to $3,110 a tonne.

 

The stable performance defied a performance by prices of the product at Tuesday’s GlobalDairyTrade auction which disappointed some observers, in holding steady despite a run up in futures ahead of the event.

 

“WMP prices at the auction were unchanged – a stark contrast to the hefty gains in WMP futures since the previous auction,” said Tobin Gorey at Commonwealth Bank of Australia.

 

ASB bank (which is owned by Commonwealth Bank of Australia) said that GDT values were “a touch softer than our expectations”, while BNZ had also seen potential for the auction to produce “slightly higher” whole milk powder prices.

 

‘Production is slowing’

But Mr Gorey said that expectations that New Zealand’s current peak, spring flush in milk output will be “on the low side… should at least bolster, if not boost, prices”.

 

ASB said that it was forecasting for New Zealand “flat production for the 2019-20 season”, despite output in the June-to-August period, the first three months of the marketing year, running 3.8% higher year on year.

 

“More recent evidence indicates that production is slowing on annual growth basis in line with our expectations,” ASB senior rural economist Nathan Penny said.

 

“If our production forecast proves close to the mark, then global dairy prices are likely to firm over the remainder of 2019.”

 

‘May limit growth’

However, some economists are more upbeat on milk output prospects in New Zealand, which vies with the European Union for the rank of the world’s top dairy exporter.

 

The US Department of Agriculture, noting that “New Zealand is at the calendar point where seasonal milk production typically is at the peak, said that many observers were “optimistic”.

 

“The consensus is that milk output will exceed the last season,” it said, although adding that “some observers are less sure that the increases last season will be matched this season”.

 

It flagged dairy-related debates in New Zealand over factors such as water quality, which are leading to regulations, saying that “public reaction is still being assessed as to dairy requirements which may limit growth, or even lead to a reduction in the dairy herd”.

 

‘Rising pressures’

Indeed, Westpac said that, while it had pencilled in 1% growth production, milk prices taken alone were high enough to suggest faster growth.

 

"Normally an expected milk price as high as this would incentivise dairy farmers to look for ways to ratchet up their output,” Westpac senior economist Michael Gordon said.

 

“But we think they will be more cautious about expanding this year, as they grapple with rising regulatory and environmental pressures.”

 

‘Definable mood of caution’

Separately, Brian Peacocke, rural spokesman at Reinz, the real estate institute of New Zealand, said that in income terms, “the outlook remains good” for the country’s dairy farmers, and indeed producers in the beef, sheep and horticulture sectors too, supported by “low interest rates and a benevolent exchange rate”.

 

However, he flagged that a “definable mood of caution remains within the rural sector” nonetheless, thanks to “the overwhelming raft of compliance and water quality issues, coupled with the continuing reports of a restrictive lending environment within the banking sector.

 

Reinz reported dairy farm prices, as measured by its index, soaring 21% year on year in September.

 

For the July-to-September quarter, the median dairy farm price worked out at NZ$38,102 per hectare, up from NZ$30,876 per hectare a year before.

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