Dairy prices expected to lift on threat of drought

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NZN

Prices at the GlobalDairyTrade auction may lift next week, snapping four consecutive declines, as an increased threat of drought in New Zealand weighs on expectations for Fonterra's milk production.

With a reduction in supply driving them higher, NZ’s largest export whole milk powder rose 2.3%.

Source: 1 NEWS

The NZX whole milk powder futures contracts for December last traded at $US2840 a tonne, 3.7 per cent ahead of the equivalent contract at the last GlobalDairyTrade auction on November 21.

That signals traders expect the price to rise at the next auction on December 5.

Longer-dated whole milk powder futures contracts are also signalling an increase, as are futures contracts for skim milk powder, while futures for butter and anhydrous milk fat point to declines.

At the last auction, the GDT price index fell 3.4 per cent to a seven-month low of 969 on expectations increased supply would weigh on demand.

Since then, the risk of a drought in New Zealand has heightened, raising concerns dry conditions may stymie grass growth and impact milk production for the world's largest dairy exporter.

That rising threat appears to outweigh lingering concern about oversupply of skim milk powder in Europe.

"It's a big contest at the moment broadly speaking in dairy between very strong volume growth coming out of Europe and the big stockpiles of skim milk powder in particular up there versus the spreading dry in New Zealand," Bank of New Zealand senior economist Doug Steel said.

"We are looking for a small gain in the GDT price index overall, driven by whole milk powder. In the context of four declines at the previous auctions, I would categorise it more as some chance of stabilisation."

Still, BNZ continued to expect Fonterra to lower its forecast farmgate milk price for this season from its current level of $6.75 per kilogram of milk solids to $6.30/kgMS.

Mr Steel said despite the futures pointing to a lift in the price for skim milk powder, he expected the product to remain weak "for quite some time" given the big stockpile and increased production in Europe.

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