Futures market analysts say the Global Dairy Trade average price could yet sink as low as US$1250 to US$1500 per tonne. The average price on the latest auction was US$2746, after a 10.8 per cent fall.
Melbourne analyst Craig Ferguson, of Antipodean Capital Management, said dairy prices could fall by up to 60 per cent as global milk supply rises. He suggests prices are likely to fall further and for longer «than many think».
New Zealand analyst Peter Redward, whose company Redward Associates provides macro-economic analysis to Asia Pacific clients, said dairy prices would continue to fall «simply because supply is greater than demand».
He said it was not impossible that the GDT average price could fall to US$1500 a tonne. His company is forecasting a milk price below $5 for the coming season. The strong Kiwi dollar is an under-estimated part of the reason for the deteriorating outlook.
Redward said some farmers were already in a «cash burn» situation and a second season of low milk price would see farms in financial distress and banks reacting.
«If prices continue to erode it’s hard to see how we won’t see a correction in farm prices.»
ANZ economist Con Williams predicts low dairy prices for six to 12 months ahead.
«Definitely in the near term there is downside pressure – but not to US$1500 tonne.»
More optimistic is Dairy Companies Association of New Zealand (DCANZ) executive director Kimberly Crewther, who supports the theory that world milk production will ease in response to lower prices. She said a 60 per cent price fall as suggested by Ferguson would carve some prices down to substantially below global financial crisis prices.
Ferguson, formerly at global investment bank JP Morgan and ANZ Investment Bank, said he based his forecast that dairy prices would continue to fall on dairying’s «inelastic supply curve» response to price changes. Dairying was not alone in that – iron ore and oil producers also kept producing when prices fell.
Dairying’s inelasticity was due to weather – whatever is produced is supplied – but also to high debt levels which locked in high costs of production, Ferguson said.
Supply was due to expand from Europe and the US by 3-6 per cent a year. «Significant increases in supply such as this tend to operate along with the steep demand curves to produce greater than normal declines in price.»
Ferguson said wholemilk powder supply was expected to expand globally by 5- 6 per cent a year.
«Typically, when supply rises by 5 per cent or so you get a significant (25-30 per cent) fall in Oceania prices. We expect the same to occur this time round.»
The UK dairy industry and US agriculture department had estimated milk supply from their respective countries would increase conservatively by up to 6 per cent a year in the next five years.
Ferguson said inelastic commodity price markets tended to «overshoot», as was occurring with oil and iron ore, and he saw no reason why dairying would not share that experience.
«As a result, dairy prices are likely to fall further, and for longer in duration, than many think.»
ANZ’s Williams said global milk production would start to slow up «maybe six to 12 months out».
New Zealand and US cow cull kills were well up and there could be up to 3 per cent fewer cows milked in New Zealand next year.
«Everyone is talking up Europe and there are definitely efficient producers there for the end of product quotas but … they’ve got to make a buck and we are seeing stories that inefficient producers are not making any money. To me that means they will cut back on costs, which means lower production per cow.»
Williams agreed there were dairy stock piles still to be sold, but «we don’t know how much is out there, no-one does».
Overseas, lower wholesale prices were filtering through to retail products, which would help increase demand, he said.
ANZ’s milk price forecast for the new season is $5.50-5.75/kg.
The exchange rate and Fonterra’s hedging position would have a major bearing on that forecast, Williams said.
«But we need to see milk powder prices pushing back to around the low US$3000 per tonne [GDT] to deliver those forecasts. The danger at the moment is that we trade down to US2200 in the near-term so there is downside pressure.»
DCANZ’s Crewther noted a recent report from European dairy market consultant Erhard Richarts that said milk powders and butter prices were expected «to remain at low levels in the next months but a recovery might be possible around the mid of the year». Producer prices were not likely to return to the peaks of 2013 and 2015, he said.
Crewther agreed with Richarts that last year’s higher European production was supported by good weather no-one expected again.
«And that combined with the 20-25 per cent reduction in milk price would have a dampening effect on milk production out of the EU.»
The Europe quota lift might see a modest increase in production «but it’s certainly not going to be a substantial increase we are likely to see next year».
Crewther said the market had yet to see Middle East and African buyers who typically responded in force to lowering prices. Nor had there been any intervention by European agencies to take product off the market when prices were low.
«The other thing that seems to be sitting behind some of these predictions is the idea that European production will continue growing [but] the European Commission has noted that a more constraining factor on milk production has not been quota levels, it has been the milk-to-feed price ratio.»
Source: Stuff
