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Fonterra flags boost to milk prices from waning production

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Fonterra, standing by expectations of a rise in milk prices, underlined the support being provided by weaker production and improved demand, even amid signs that the recovery in values may be taking a breather.

New Zealand-based Fonterra, the world's top milk exporter, restated a forecast that it will pay its farmers NZ$6.00 per kilogramme of milk solids in 2016-17.

That is up NZ$1.10 per kilogramme of milk solids from the decade low price its producers received last season, although still well below the NZ$8.40 paid in 2014-15.

The forecast milk price "continues to reflect improving global milk prices", said John Wilson, the Fonterra chairman, flagging "lower supply from New Zealand, Australia and Europe, and steady demand worldwide".

'Not impressive'

Indeed, the group told its investors that, on the demand side, imports by the key Chinese market had rebounded by 27% in the 12 months to July, while Latin American purchases had risen by 10% year on year.

Imports by Asian buyers outside of China had grown at a more modest pace, of 2%, while those in the Middle East were running 6% lower year on year, after some stockpiling buy buyers in 2015, exploiting low prices.

Meanwhile, on the milk output side, New Zealand production fell by 5.5% in October, which typically brings the seasonal high in volumes, while Australian collections tumbled by 11.4% to 968m litres.

"This is the first time since at least the turn of the century that [Australia's] October milk production has failed to top 1bn litres," the US-based Milk Producers Council said.

This year's seasonal "spring flush" in production in Oceania "was not impressive".

'Finally flushed through'

Meanwhile, latest data for the European Union, the top producer, show an accelerating decline, which reached 2.8% year on year in September, from levels boosted in 2015 by the removal of production quotas.

"The impact of quota removal on 1 April 2015 appears to have finally been flushed through the system," said Ed Hugo at London broker VSA Capital.

"Even though most of those countries that we outlined as likely winners early last year have significantly increased production, particularly Ireland and the Netherlands, even in these countries production growth has now moderated."

Irish milk output in September, at 583.2m litres, was down 3.5% year on year.

'Slowed to a trickle'

However, prices of whole milk powder at New Zealand's NZX exchange eased on Monday for a second successive session, this time by 0.1% to $3,600 a tonne for the best-traded December lot, in what some took as a sign of market fatigue after price gains.

NZX whole milk powder futures remain 28% higher for 2016, on a spot contract basis.

"The whole milk powder futures market looks like it lacks direction," said Tobin Gorey at Commonwealth Bank of Australia.

"We are not all that surprised because the news flow has not provided much impetus. The torrent of weaker production several months back has, in news value, slowed to a trickle of confirmation."

The futures market would appear to indicate modest prospects for further gains in prices at the next much-watched GlobalDairyTrade dairy auction, on December 20.

"The futures' premium to [results from] the last GDT auction result is quite modest," Mr Gorey said.

By Mike Verdin

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