Onwards and Upwards For Milk





Global dairy prices still marching higher
As world milk supply tightens
NZD hasn't followed latest gains
We lift our milk price forecast to $6.40
Watching EU supply, stocks and schemes
SMP Lagging WMP
Milk Powder Prices
USD/T
6000
5500
5000
4500
Onwards and upwards. Tightening milk supply in key dairy
exporting regions continues to drive dairy prices higher.
4000
3500
3000
2500
The GDT Price Index rose 3.5% at auction overnight to be
up 51% on a year ago. This result was in the top half of
our expected range. Volumes on offer at this auction were
20% lower than the equivalent auction a year ago and
43% lower than two years ago.
Price increases were widespread, although with relatively
smaller gains of +1.4% in skimmilk powder (SMP) likely
reflecting the overhang of the EUs massive SMP
stockpile, which will start being released this month.
Wholemilk powder (WMP) prices rose nearly 5%, to an
average of US$3,593/T. WMP prices have essentially
doubled from the lows of August 2015. The spread
between WMP and SMP pricing has now extended to
more than $1,000/T (only some of which seems explained
by higher milk fat prices).
Strength in WMP forward contracts into the middle of
next year is encouraging. There is no sign there that an
end to the EU’s Milk Production Reduction Scheme early
next year will dent prices. Or at least any price hit from
that will be offset by other factors such as Dutch milk
supply potentially being significantly curtailed by fertiliser
limits. There remains a lot to watch in the EU, including
weakness in the EUR. The latter is making rising world
2000
1500
Wholemilk Powder
1000
Skimmilk Powder
500
0
2010
2011
Source: GDT, BNZ
2012
2013
2014
2015
2016
Monthly
prices more attractive to EU producers that will encourage
more supply, in time.
Meanwhile, October figures show NZ peak milk
production well behind year earlier levels, although it is
worth noting that NZ has put the wet spring behind it and
recent reports of better grass growth is likely to see
recent production not trailing last year as much as
October’s 6%. We’ll see. Our 2016/17 NZ milk production
forecast remains for a decline of between 3% and 4% on
the previous season.
Less NZ milk to date is adding to a tightening in global
supply. EU milk production was down 3% y/y in
September and probably down more over recent months.
And various reports suggest Chinese production is down
on last year (aiding import demand), Argentina milk is well
down on a year earlier, and so too Australia. Australian
NZ Milk Supply Lower
On the Charge
Dairy Auction Prices - GDT
USD Index
Annual
% change
1800
Milksolid Production
20.0
2012 very favourable
summer/autumn
conditions
15.0
1500
Forecast
Favourable
2014 weather
and rebound
from drought
10.0
1200
5.0
0.0
900
2013
summer/autumn Fewer cows,
very low prices,
drought
poor earlyspring weather
-5.0
600
-10.0
Fewer cows,
low prices,
weather
-15.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
300
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
15
16
Source: LIC, DCANZ, BNZ
Source: GlobalDairyTrade, BNZ
Weekly
Season
production is tracking below Dairy Australia’s forecast of a
5% fall for the full 2016/17 season, with October data
showing a drop of 11%. The US continues to buck the
trend with more milk being produced (although exports
are being limited by reasonable domestic demand and the
strength of the USD).
Meanwhile, the latest OPEC-inspired jump in oil prices
makes current dairy prices look less stretched relative to
oil although dairy still looks pricey relative to still low grain
prices (one factor encouraging more US milk supply).
Positive Balance for NZ Milk Price
USD Index
NZD/USD
GDT Dairy Prices and NZD/USD
1800
1.10
1.05
NZD/USD (rhs)
1600
1.00
0.95
1400
0.90
0.85
1200
0.80
1000
0.75
0.70
800
0.65
0.60
600
0.55
Dairy Price (lhs)
All this sees us lifting our 2016/17 milk price forecast to
$6.40 per kilogram of milksolids (from $6, which we had
previously suggested contained upside potential). The
milk price could well end up higher than this if global milk
supply continues to contract more than anticipated (or
lower if production holds up). Of course, demand will play
its part too.
Our new forecast includes ongoing firm pricing near term,
with some retreat into season end as the current intense
global milk supply squeeze somewhat abates. We see
risks tilted to near term price gains, but with the potential
for some consolidation during 2017. If dairy prices and the
NZD hold around current levels for the remainder of the
season, then the milk price may even be higher than our
forecast. The NZD/USD has not followed recent dairy price
gains, a positive for milk prices in NZ. As we have been
emphasising, there remains a wide error bound around
any particular forecast. In this light, we maintain our
2017/18 milk price forecast at $6.
Note Fonterra has its AGM tomorrow. It might be too
soon for the co-op to make another forecast change (it
moved to $6 less than 3 weeks ago), but you never know.
What we do know is that current international conditions
maintain upward pressure on milk prices in NZ.
0.50
400
200
Aug 08
The widening gap a positive for milk price in NZ
0.45
0.40
Aug 09
Aug 10
Aug 11
Aug 12
Aug 13
Aug 14
Aug 15
Aug 16
Source: GlobalDairyTrade, BNZ
Weekly
Latest dairy price gains continue to push against RBNZ
assumptions. In its November MPS, the Bank said it
assumed some of these ‘recent dairy price gains are due
to temporary factors and are likely to reverse’. Clearly, the
further prices push higher and/or the more time that goes
by before they pullback, the more the RBNZ will need to
alter its calculations. This is likely to result in it having
either less discomfort with a firm NZD and/or seeing even
less chance of the OCR going lower.
Regards macroeconomic indicators, the broad direction
here supports our view that the OTI measure of the
merchandise terms of trade will be nudging record levels
around the middle of 2017. That would be a boost to
nominal GDP and the tax base. Another positive for the
fiscal accounts ahead that already look good, which
tomorrow’s numbers should confirm.
[email protected]
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