The continued downward slide of the NZ economy

Kiwi dollar falls as dairy prices plunge at latest auction

ANZ Bank has revised down its Fonterra farmgate milk price to $3.75 to $4.00 a kg of milk solids from its previous forecast of $4.50 a kg after sharp decline in dairy prices at this morning's GlobalDairyTrade (GDT) auction.

NZ Herald,

16 July, 2015

The bank's rural economist Con Willais said the volumes on sale are set to rise over coming months as New Zealand supply comes on stream, but demand, particularly from China, was "conspicuously absent".

"ANZ was already bottom of the market with our forecast of a $4.50 milk price; we now expect $3.75-$4.00/kg MS, but it is a guessing game where the bottom might be," Williams said.

"Even more pressure now comes on Fonterra's response, including its restructuring plan and dividend performance," he said.

Read more:
• NZ dollar falls on weak dairy auction
• Fonterra farmers embrace latest guaranteed price

Westpac said it it would make a "a significant downward revision" to its farmgate milk price forecast for this season, which currently stands at $5.40/kg, later today.

The latest GlobalDairyTrade auction was a shocker, the GDT price index dropping by 10.7 per cent from the last sale a fortnight ago and with wholemilk powder prices registering their biggest fall in 12 months

Whole milk powder - which is responsible for about 75 per cent of Fonterra's farmgate milk price - fell in price by 13.1 per cent to US$1,848 a tonne to its lowest level in six years.

Fonterra's current milk price forecast of $5.25 per kg of milksolids for 2015/16 is based on GDT prices reaching about US$3500 a tonne towards the end of this season. Dairy NZ estimates $5.70 a kg to be the break-even point for most farmers.

AgriHQ dairy analyst Susan Kilsby said the auction result was "disastrous".

"Farmers now face two consecutive seasons of extremely low milk prices," she said in a commentary. "The majority of farmers can't break-even at such a low milk price."

Economists estimate a $1/kg drop in the milk price equates to about $2 billion less income for dairy farmers.

"Farm debt levels will rise. Rural communities will suffer as farmers reduce spending to the bare essentials," Kilsby said.

AgriHQ's theoretical 2015-16 farmgate milk price has decreased to $4.22 per kg milksolids - down 83c on a fortnight ago and $1.27 lower than a month ago.

The dairy auction result was responsible for taking around 40 pips off the Kiwi dollar, and the NZ/Australian dollar cross rate dropped to below A89.50c.

See the recent decline in world dairy prices here:

Source: Global Dairy Trade

"It is hard to see markets remaining sanguine about the New Zealand dollar with the coming boost to auction volumes," Sam Tuck, senior foreign exchange strategist at ANZ Bank, said. "We expect the New Zealand dollar to remain under pressure across the board," he said.

Brian Rice, principal and owner of Chicago-based commodities broking house - Rice Dairy - said the GDT result showed that the trend in low dairy prices was not over yet.

He added that it appeared from the GDT result that New Zealand was struggling to clear product.

"I definitely view it as a cyclical thing and this cycle will end," he said. "Some time over the next five years, the world will be short dairy product," Rice said.

Price declines were across all but one of the products offered for sale at the auction.

Cheddar prices dropped by 13.9 per cent to US$2,613 a tonne, skim milk powder by 10.1 per cent to US$1,702/tonne, butter by 9.5 per cent to US$2,460/tonne and rennet casein by 8 per cent to US$5,430/tonne.

See more details of the overnight auction here:

Farmers now face two consecutive seasons of extremely low milk prices," she said in a commentary. "The majority of farmers can't breakeven at such a low milk price.

AgriHQ dairy analyst Susan Kilsby

Butter milk powder prices dropped by 4.4 per cent to US$1,794 a tonne and anhydrous milk fat lost 10.6 per cent to $2,621. The only product to gain was lactose, which firmed by 1.9 per cent to US$549/tonne.

NZX dairy futures pricing suggested prices might fall at this morning's auction but not nearly to the same extent. The average winning price was US$2,082 a tonne.
Prices, after a steep decline in 2014, bounced back in February this year but have been falling ever since.

Oversupply, slack demand from the world's biggest dairy importer - China - Russia's import ban, the removal of dairy production quotas in Europe and higher production arising from cheaper feed costs have all acted to depress dairy prices.

Economists expect prices to stay low this year before the balance between supply and demands starts to improve next year.

The Reserve Bank has flagged a weak dairy sector as one of three key risks to the nation's financial stability, saying about a quarter of farmers were operating in negative cash flow.

The bank cut its official cash rate by 25 basis points to 3.25 per cent on June 11 and financial markets are pricing in two more cuts by the year's end.

Prices show signs of bouncing back in February but have declined at every sale since March 17. Trade on the NZX futures suggested that wholemilk prices would decline by around 8 per cent, not the 13.1 per cent fall that transpired at the auction.

Domestic milk production, despite low prices, was strong in May - the last month of the 2014/15 season. According to Dairy Companies Association of NZ (DCANZ) data, the sector produced 80.8 million kg of milksolids in the month, down from 138m kg in April but up from 72.3m kg in May 2014.

Federated Farmers said on Wednesday its new-season July 2015 Farm Confidence Survey had moved further into negative territory because of further declines in dairy prices.