NZX milk futures fall below Fonterra forecast as traders bet on downward revision

Friday 7th October 2016

New Zealand milk price futures have fallen below Fonterra Cooperative Group's current farmgate payout forecast as traders doubt a sharp gain in prices can be sustained.

The NZX milk futures contract for the 2016/17 season hit a record $5.65 per kilogram of milk solids following four consecutive gains in whole milk powder prices on the GlobalDairyTrade auction platform, which pushed up the average price by 36 percent to US$2,793 a tonne on Sept. 6. However, a 4.1 percent decline in whole milk powder at the following two GDT auctions since then has weighed on the milk futures, which recently traded at $5.15/kgMS, below Fonterra's current expectation for its farmgate milk price for the season of $5.25/kgMS, which it hiked from $4.75/kgMS on Sept. 21.

"The GDT is a more current way to gauge where the payout might be going as Fonterra is only updating their payout relatively infrequently so on the back of a weaker GDT the milk price future is going to move a lot quicker than Fonterra might update their estimates," said OMF commodities dealer Karl Arns. The milk futures show traders "expect a revision down" to Fonterra's payout, he said.

The latest pullback in GDT whole milk powder prices following a sharp rally mirrors last year's trend, which analysts say is likely driven by seasonal demand as traders secure product to take advantage of a lower tariff rate under New Zealand's free-trade agreement with China at the start of each calendar year. Still, declining production is expected to underpin future prices.

"The physical market is in reasonable sort of shape as production has come off," said OMF's Arns. "Given that, we are relatively positive. The market did shoot up extremely quickly and that can often be unhelpful and unsustainable, so we would probably view what's happening here as more of a consolidation rather than an imminent correction and a massive fall coming."

Dairy products are New Zealand's largest commodity export, and were worth $10.94 billion in the 12 months ended Aug. 31. The next GDT auction is scheduled for Oct. 18.

BusinessDesk.co.nz

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