Feb 17, 2016 - In particular, Fonterra is likely to open the 2016/17 season with a forecast in low $5 range (and then li
GlobalDairyTrade Auction
17 February 2016
A long and winding road •
Dairy prices dropped for the fourth successive auction this year.
•
As the short-term NZ milk production outlook improves versus earlier expectations.
•
We trim our 2015/16 milk price forecast to $3.90/kg and take our 2016/17 forecast down to $6.00/kg.
Summary The dairy price ducks refuse to line up. First, good growing conditions have moderated the anticipated dip in NZ production this summer. At the same time, global growth concerns (read China) and commodity market weakness continue to spillover into dairy markets and sideline buyers. It seems dairy can’t catch a break.
Season end milk price forecasts 2015/16 2016/17 Fonterra ASB ASB Milk Price* $4.15 $3.90 $6.00 * per kg of milk solids (excluding dividend).
Auction Results
In the end, we still expect lower NZ supply to boost prices. But this adjustment is taking more time than we anticipated, and therefore our milk price outlook has changed. In particular, dairy prices will start the 2016/17 season lower than we anticipated earlier in the year.
Product Whole Milk Powder (WMP) Skim Milk Powder (SMP) Butter GDT Price Index
As a result, we have trimmed our 2015/16 by 20 cents to $3.90/kg. Similarly, we have moved down our 2016/17 forecast by 50 cents to $6.00/kg.
10
% change in Weighted Annual % index since last Average Price change in index auction US$/MT -3.7% -1.4% -2.3% -2.8%
-39.0% -34.2% -26.2% -33.2%
Source: Fonterra, ASB
Dividend 8
The drop follows NZ production holding up better than expected, with the threat of an el Niño drought this summer all but gone. Indeed, the larger WMP fall relative to SMP at this auction fits with this result being a (better) NZ production story. Earlier this month, we revised our milk production forecast to 3% below last season from our previous view of 6% below.
2
1,890 1,762 2,834 n.a.
MILK PRICE AND DIVIDENDS (per kg milksolid)
$
Auction Comment Overall dairy prices dropped for the fourth successive auction in 2016, with a 2.8% fall overnight. WMP continued its weak 2016 theme, dropping 3.7% (now down 18% since the end of 2015). Casein recorded the largest fall (down 11.5%), while SMP and butter prices fell 1.4% and 2.3%, respectively. AMF bucked the trend, lifting 1.5%.
Moreover, weak global sharemarkets and commodity markets are reinforcing dairy market weakness. In these market conditions, buyers prefer to sit on the sidelines and wait until prices bottom.
Long Run ASB $6.50-$7.00
ASB Milk Price forecasts
Milk Price 6
4
0 05 06 07 08 09 10 11 12 13 14 15 16 17 Long Run
Index 950 900
With the above in mind, we note the dairy price recovery is proving more drawn out than anticipated. Nonetheless, we maintain the view that prices will lift over the course of 2016. In addition we note that the full impact of a lower NZ dollar will boost the 2016/17 milk price (our assumption lifts the milk price by around 70 cents compared to this season).
850
Implications We trim our 2015/16 milk price forecast by 20 cents to $3.90/kg. In addition, we take our 2016/17 forecast down 50 cents to $6.00/kg. We also note that farm cashflows will take longer to recover. In particular, Fonterra is likely to open the 2016/17 season with a forecast in low $5 range (and then lift it towards $6 over the season, if our view proves correct).
600
800
GLOBAL DAIRY TRADE AUCTION RESULTS SINCE APRIL 2015 Jan/Feb 2016 Chinese concerns-induced price weakness
Whole Milk Powder
750 700 650
GlobalDairyTrade Price Index
550 500
Sources: GlobalDairyTrade
July 2015 Chinese concerns-induced price weakness 450 Apr 15 Jun 15 Aug 15 Oct 15 Dec 15 Feb 16
Meanwhile, this result reinforces our OCR view; we expect two further cuts in June and August this year, taking the OCR down to 2% from 2.5% currently.
Nathan Penny – Rural Economist – 649 448 8778 –
[email protected] Please refer to the important disclosures at the end of this document
17 February 2016
ASB Economics & Research Chief Economist Senior Economist Rural Economist Economist
Phone Nick Tuffley Jane Turner Nathan Penny Kim Mundy
[email protected] [email protected] [email protected] [email protected]
(649) 301 5659 (649) 301 5853 (649) 448 8778 (649) 301 5661
Fax (649) 302 0992
https://reports.asb.co.nz/index.html @ASBMarkets
ASB Economics ASB North Wharf, 12 Jellicoe Street, Auckland
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