NZX milk powder futures suggest dairy prices will slide further next week

The price for New Zealand's key dairy export, whole milk powder, may drop further at next week's GlobalDairyTrade auction as dairy farms boost production amid a global glut in milk supply.

The current July whole milk powder futures contract last traded on the NZX at $US1910 a tonne. Because the price is an average of two fortnightly auctions and the contract was priced at $US2000 a tonne in last week's auction, traders see a decline of 10% to $US1800 a tonne next week. The longer-dated whole milk powder futures contracts are all trading at a discount to the GDT, suggesting traders expect prices to fall.

Dairy prices have remained lower for longer amid higher global supplies in New Zealand, Europe and the US, weak demand in China and an import ban in Russia. New Zealand production is rising, heading into the country's peak supply period in October, while US farmers are reportedly dumping milk and the EU has ended its quota limits.

"It's pretty negative, there's a lot of selling in the futures and there's not much buying – this market looks completely stuffed," said OMF financial markets director Nigel Brunel. "Whole milk is looking to be down another thumper, and then it gets worse because the volume starts to step up again as we get into August. There is just a gap between what is being produced and what is being consumed."

Weaker dairy prices are weighing on New Zealand's economy, cited as a reason for decade-low rural confidence levels, deteriorating business confidence and are firmly on the radar of the Reserve Bank which has begun cutting interest rates to bolster slowing growth.

"It's going to put more pressure on the Reserve Bank to ease," Mr Brunel said.

Traders are pricing in a 96% chance the Reserve Bank will cut the benchmark interest rate at this month's meeting, according to the Overnight Index Swap curve. Some economists are forecasting three further interest rate cuts this year, which would fully reverse the central bank's tightening in policy last year when it raised interest rates by a percentage point.

The New Zealand dollar touched a fresh five-year low of 66.19USc overnight, with traders citing the impact of weaker commodity prices.

"The kiwi is under pressure," said Mr Brunel. "It has a real trickledown effect on other parts of the economy."

Weak dairy prices have prompted analysts to pull back their expectations for Fonterra Cooperative Group's payout to farmers this season, with most forecasts now sitting below the dairy exporter's $5.25 per kilogram of milk solids. Market expectations range between $4.50/kgMS and $5.40/kgMS.

(BusinessDesk)