4 Nov 2015

Shock needed for dairy recovery - analyst

3:42 pm on 4 November 2015

A shock such as an El Nino or a disease outbreak is needed for dairy prices to recover, a Rabobank research analyst says.

Prices have been on a rollercoaster in the past three months and they fell again in the overnight GlobalDairyTrade auction.

The key commodity, whole milk powder, dropped 8 percent to $US2453 a tonne, following a 3.1 percent fall a fortnight ago.

Prices for all other products traded at last night's auction fell by between 11 and 4 percent, leaving the overall price index 7.5 percent lower at $US2569 a tonne.

Between August and October prices rose in four consecutive auctions and it was believed they would hit the $3000 mark by the end of the year but that had now been pushed out to the end of this milking season next May.

Fonterra's forecast payout is sitting at $4.60 per kilogram of milk solids and farmers will be keeping a close eye on the next GlobalDairyTrade auction, which will take place just before the co-operative revises its farmgate milk price at the end of this month.

Rabobank research analyst Emma Higgins said the falls were not surprising as demand remained weak.

"Unfortunately the market place remains in quite a difficult position. We've had monster production in major supply areas, particularly out of Europe where production is slowing but we do need it to slow further so the market is trying to clear these large volumes," she said.

"The issue is that Chinese buyers appear to have filled their requirements for their of 2016 quota imports of NZ product and other buyers are also very well stocked, so unfortunately the only way to move product is at very low prices."

A shock to the industry, such as an El Nino or disease outbreak, was needed before prices would increase, she said.

"What we're hoping to see in the coming weeks and months is actually these buyers work through the product and work through the inventory that they've got stored and hopefully return to the market.

"At this stage it's a bit of a waiting game and we're waiting on another shock or x-factor to really take hold of the market and drive these prices higher.

"We're expecting prices to remain near these current levels based on these current supply and demand dynamics for the next few weeks and months."