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Price correction

Key highlights

After a prolonged slump, global dairy prices have corrected higher.
Driven higher by a similar correction in global supply.
We expect the auction price lift over August will be sustained and built upon over the remainder of the season.

Report prepared by:

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

The dairy cycle. The hog cycle. Supply correction. Behavioural change. Whatever you call it, it is here, and dairy markets have pushed dairy prices higher as a result.

Moreover, the supply correction is large. The reduction in the NZ dairy herd is big and unprecedented. The estimated 5% or circa 300,000 head reduction in the herd is the largest on record. Also, it comes on top of last season’s 3% fall. Indeed a back-to-back fall in the NZ dairy herd is also a first.

The supply correction is also irreversible. Once farmers cull at this level, there is no going back. Dairy production will fall, with the question turning to “by how much?”

These factors give us confidence that the auction price lift over August will be sustained and built upon over season. Other factors like weather, currencies will come into the price mix at the edges. All up though, our view is that dairy prices have corrected higher for the season. Accordingly, we reaffirm our 2016/17 milk price forecast of $6.00/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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