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Muddy waters

Key highlights

Dairy auction prices decrease overnight against expectations of a modest rise.
The fall may reflect a similar recent price reversal in other commodity markets such as oil.
Meanwhile, yesterday’s EU support measures have further muddied the dairy price waters.

Report prepared by:

Nathan Penny, ASB Rural Economist
Phone: +64 9 448 8778
Email: nathan.penny@asb.co.nz

Last night’s auction result was a good reflection of the current fragility of this part of the dairy cycle. After a positive result last auction, weak commodity market sentiment, particularly from oil, knocked dairy prices back overnight. As a result, prices gave back much of last auction’s gains.

Moreover, this dynamic is likely to continue for a while. Over the coming months, we expect that any price lift is likely to be modest and often accompanied by a subsequent price fall.

But longer term, this weakness will re-inforce the cycle and price recovery. From an NZ perspective, the longer prices stay low through the first half of this 2016, the more likely the opening season milk price forecast will also be low. And then on this basis, the larger the supply response from farmers is likely to be.

In this sense, we repeat our caution around 2016/17’s milk price forecast. While we expect the milk price to end the season at $6.00/kg, as noted above, we expect it to start closer to $5.00/kg.

Read the full PDF Report

Important Disclaimer - The views expressed herein are those of the authors and are based on information believed but not warranted to be correct. Any views or information, whilst given in good faith, are not necessarily the views of ASB Bank Limited and are given with an express disclaimer of responsibility and no right of action shall arise against any of the authors, ASB Bank Limited or its employees either directly or indirectly out of any views, advice or information.
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