NZ Dairy auction: Bottom in prices found, still tough down the farm road - ANZ

FXStreet (Bali) - The ANZ Research Team reviews the solid improvement registered in Fonterra's GlobalDairyTrade, noting that while the bottom has been seen, things will remain tough for some time to come.

Key Quotes

"Just like the cure for high prices was higher prices; it looks like the same can be said for low dairy prices. GlobalDairyTrade registered another solid improvement last night with the GDT-TWI +16.5% and WMP +20.6%. While year-to-date prices are tracking in the mid-$3/kg MS range, forward prices are now consistent with a $4.25-$4.50/kg MS forecast (our revised view for now)."

"The main catalyst for further improvement would appear to be China’s higher seasonal requirements, slowing European supply in some key regions and building expectations of lower New Zealand supply in 2015/16. Fonterra did all but cut its milk production forecast further last week and the market continues to price in some risk of an El Nino impact later in the season with the milk powder curve now upward sloping."

"Outside of a widespread El Nino impact (which is impossible to forecast) we believe milk supply will be down by 5+% due to lower cow numbers and farm management changes. There is a risk the drop could be larger with milk production already running behind last season and a generally wetter, cooler spring impacting on early season production, which will affect the seasonal peak."

"The flipside is an improved milk price outlook will no doubt bring supplementary feed back into the equation This combined with a change in product mix and desire by Fonterra to sell a smaller proportion of supply through the GDT platform saw further reductions in GDT powder volumes, which was were the price gains were concentration last night."

"On this basis the New Zealand supply outlook remains key for price direction. However, it must be remembered lower New Zealand production is not the ideal catalyst for a turnaround as it still impacts on farm profitability."

"Additionally a milk price in the mid-$4/kg MS – if that were the final outcome - would still be well below par and cashflow for the 2015/16 financial year is still only around the mid-$3/kg MS. It has seen most businesses require seasonal finance of around $1-$2/kg MS to make it through. So while the bottom has been seen, things will remain tough down on the farm for some time to come."

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