NZX milk futures suggest GlobalDairyTrade prices may drop 5% at next week's auction

The price for New Zealand's key dairy export, whole milk powder, may drop about 5% at tomorrow's GlobalDairyTrade auction amid lacklustre demand.

The current November whole milk powder futures contract last traded on the NZX at $US2550 a tonne, a discount to the $US2740 a tonne at the October 20 GDT auction. The longer-dated whole milk powder futures contracts are also all trading at a discount to the GDT, suggesting traders expect prices to fall at tomorrow night's auction.

Whole milk powder makes up the majority of product sold on the GDT platform, and its decline is likely to pull down the average GDT auction price, analysts said. That would mark the second straight drop in the fortnightly auction after four consecutive gains. The Reserve Bank, which has cut interest rates three times this year and retains an easing bias, noted the improvement in dairy prices when it kept interest rates on hold last week, although it said it was too early to say whether the gains would be sustained.

"On the basis of the futures being at a discount to GDT, I'm suspecting GDT might be down again," said Nigel Brunel, financial markets director at OMF, which expects GDT to fall 5%. "Offshore markets look a little bit weak."

Brunel said a decline may weigh on the kiwi currency as traders bet it will cement an interest rate cut at the Reserve Bank's next meeting on Dec. 10. Thirteen of 14 economists expect the Reserve Bank to cut the benchmark a quarter point to 2.5% at the meeting, according to a Reuters poll published today.

"There was an expectation that there will be one further cut in interest rates so if dairy is down, kiwi might react on the basis the RB might react so I think we might see kiwi a bit lower," Mr Brunel said.

Traders appear to have bought ahead of a projected reduction in supply, prompting the recent declines, Mr Brunel said.

Buyers in the Chinese market may also have bought ahead to secure supply that would be eligible for lower tariff rates applying to the first 100,000 tonnes into China from Jan. 1, as part of the free-trade agreement, he said.

Still, Mr Brunel said he thought whole milk powder was a buy at current levels given the potential for an El Nino drought in the first quarter next year, which could crimp production and push up prices.

(BusinessDesk)