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Synlait Milk positive on dairy prices, as New Zealand dryness worries mount

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Synlait Milk forecast that dairy values would remain buoyant as it raised its milk price, amid growing ideas that milk output in New Zealand and elsewhere will remain constrained.

 

The New Zealand-based processor lifted by NZ$0.25 per kilogramme of milk solids to NZ$7.00 per kilogramme of milk solids its forecast for 2019-20, taking it further above the base price of NZ$6.40 paid last season.

 

The upgrade reflected “higher-than-expected [dairy] commodity prices at the end of 2019”, said Leon Clement, the Synlait chief executive.

 

He added that the group believed these prices “will hold in the medium term as supply and demand continue to be evenly matched”.

 

Price gains

The comments follow a strong start to 2020 for dairy prices at GlobalDairyTrade auction, where values rose by 4.5% over the year’s first two events, the latest of which was last Tuesday.

 

Whole milk powder on the NZX exchange have continued to rise since, with the March contract on Monday closing up 0.2% at $3,350 a tonne.

 

That extended to 7.5% the lot’s gains for 2020, and took it $10 a tonne from matching a nine-month high for a nearest-but-one contract.

 

‘Showing signs of slowdown’

Prices have been supported by growing concerns of a slowdown in milk production in New Zealand, which vies with the European Union to be the world’s top dairy exporter, and which saw output growth in December slow to 0.2% year on year, from 0.4% in November.

 

“Dairy production is showing signs of slowdown,” said Nathan Penny, senior rural economist at ASB bank, noting that “January has been hot and dry across many parts of the country”.

 

While saying that, for now, he was sticking with a forecast for zero growth in New Zealand milk production this season, Mr Penny added that “if drought eventuates, that forecast may prove too ambitious.

 

“For dairy, dry weather will constrict production and put upward pressure on prices”.

 

Australian cheese import surge?

Output in other major exporting countries has slowed too, with output in drought-hit Australia down 5.3% year on year in the July-to-November period, the first five months of the country’s 2019-20 production year.

 

European Union milk collections rose by 0.5% year on year in the first 11 months of 2019.

 

In the US, the Milk Producers Council noted that in 2019, “US milk production topped that of 2018 by just 0.3%, the smallest annual gain since 2009”, adding that “modest growth in the US and Europe and a milk production deficit in Oceania have helped to turn the dairy markets around after a rough four years”.

 

The council also forecast that the Oceania slowdown was “likely to continue”, given that “it’s hot and dry in Australia and turning dry in parts of New Zealand”.

 

In fact, the extent of Australia’s slowdown has “sparked rumours that Australia will be importing large volumes of cheese from New Zealand”.

 

Red flag?

However, the extent of the gain in New Zealand prices is also being watched as to where this places them with reference to values in the EU, where whole milk powder was worth E3,070 ($3,384) a tonne as of January 19, according to latest European Commission data.

 

Although New Zealand prices do tend to outperform at this time of year - as the country’s milk output sees a seasonal downturn while that in the northern hemisphere looks to its spring flush high – a continuation of their recovery could leave their discount “ unusually modest”, said Tobin Gorey at Commonwealth Bank of Australia.

 

“That can be a red flag.”

 

Nonetheless, “the dry period in most dairy regions of New Zealand means though we do not think that flag will be raised for now

 

“Weather forecasters are not projecting any widespread rainfall in New Zealand into early next month. Only dairy regions on the southern fringe look likely get any rain, and even that is modest.”

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