Futures point to stronger dairy prices in next week's GlobalDairyTrade auction

Friday 26th February 2016

The price for New Zealand's key dairy product, whole milk powder, looks set to advance at next week's GlobalDairyTrade auction for the first time this year, according to traders who are pricing in an increase on the NZX futures market.

The March whole milk powder contract on the NZX futures market last traded at US$1,940 a tonne, up from US$1,835 a tonne in the equivalent contract at the last GDT on Feb. 16 in the US. Whole milk powder futures contracts for March through July are all trading at a premium to their previous GDT level, implying prices will gain.

The average price for whole milk powder has dropped 18 percent at the four fortnightly auctions this year to US$1,890 a tonne as global milk supply continues to outweigh demand. The current futures pricing points to a 5 percent gain in whole milk powder prices at next week's overnight auction on March 1, which would push up the wider market, according to brokerage OMF.

"Everything has now flicked to a premium," said Nigel Brunel, financial markets director at OMF in Auckland. "One would imagine that whole milk powder is going to be up on GDT next week and I think overall things will be firmer on GDT even though fundamentally I struggle to explain that because there seems to be a chunk of milk out there and what's changed?

"Definitely, the volatility persists."

Traders could be speculating that prices will rise as New Zealand, the world's biggest exporter of whole milk powder, heads into the tail-end of its milk producing season and volumes decline, he said.

Some buyers may also be betting that milk is cheap under US$2,000 a tonne, he said.

Dairy products are New Zealand's largest commodity export, and the decline in prices means payments that milk processors like Fonterra Cooperative Group make to farmers are below the cost of production for most farmers.

BusinessDesk.co.nz

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