The last auction of the year and this will be a relatively brief commentary as I have a hectic few days ahead and I have less to say!!
Ahead of the last auction I said:
“I expect another flattish to soft auction but I am hoping for something positive”
The outcome was broadly in line with that expectation although you needed to look beyond the headline. The powders did better than I expected and butter did worse than futures markets would have suggested. But, in total, the auction was solid to the extent that it held the ground in the face of what was, as expected, lower demand from China.
Grant Rowan (and his daughter Madeleine) updated the MyFarm forecasts and came out at $6.40/kgMS, which was precisely where Fonterra moved to later in the week. The futures market has also traded into line with this (last trade $6.39/kgMS). Grant and Madeleine also produced the following chart which I think is a good summary of the current situation.
There is quite a lot of information on the chart but the orange (solid) line shows the current NZD weighted auction price and the blue line (solid) shows the current spot milk price. One way of thinking about this is that the dotted blue line (4 month moving average) is the current predictor of payout ($6.40/kgMS) ,and the last point on the solid blue line a good predictor of where next season’s price would be if nothing else changed. ($6.20/kg MS)
Although relatively stable there is a general downward trend in the NZD auction price and therefore NZ $/kg milk price since the second auction in May 2017.
The McCully Report from Rice dairies is one of the more comprehensive reports on global dairy.
Key messages from that report seem to be:
The bottom line is that milk supply is not much of an issue and the European market appears to be heading to another short term over-supply situation – which is generally followed by a price fall.
The McCully report does note that drier conditions in NZ are a possible positive for global markets. However, it also notes that this “scare factor” appears regularly and was overdone both last season and earlier this season (although it was the wet conditions then). Having said that, below is the latest NIWA data that does support the contention of rapidly drying conditions.
Little to report here as well for a change.
The good news is that WMP has respected the support we were keenly watching at the last auction (just above $2,800/mt) and has lifted circa $100/mt to $2950/mt across the curve. The curve is flat to slightly in backwardation so there is little incentive to bring demand forward.
However, with close to 70% of this season’s production having likely now been sold and WMP holding, further downgrades for this season’s payout currently are not prospective.
With WMP below $3,000/mt and other products soft, a 2018/19 payout of below $6.00/kgMS looks more likely so it is important that farmers bear that in mind. As noted above, while China demand remains a positive for dairy and for WMP, dynamics in the broader market and particularly European supply, are likely to weigh on the market.
The December futures point to a small rise in the GDT auction. I don’t expect much action in WMP so the risk (as with last time) is that the bid falls away in WMP and / or in other products. So the market looks slightly positive but, on balance, I still think the risks are slightly weighted to the downside rather than the upside.
The positive wild card in the mix, as noted above, is the perception of NZ full season production potentially being impacted by the drier than normal. Summer has arrived a month early and with soil moisture deficits in excess of 100 mm in many regions- conditions are now more typical of late January or February. It is possible this could see a lift particularly in WMP interest. With the recent reduction of 30c/kg MS in Fonterra milk price and spot PKE prices being in the order of $275/T (33c/kg DM delivered on farm) the economics of supplementary feeding are also less attractive and this could also impact on the season’s production.
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