GDT: a broad based improvement - ANZ

Analysts at ANZ noted that dairy prices showed some gradual improvement with the GDT-TWI up 2.6% and whole milk powder (WMP) rising 3%.

Key Quotes:

"There was broad based improvement, with only skim milk powder (SMP) prices failing to gain (-0.9%). The weakness in SMP returns, and substantial discount that NZ product is trading to European/US product, highlights the main challenge dairy markets face in achieving substantial prices gains over the next six months. That is a seasonal overhang of Northern Hemisphere product.

If the likes of WMP become too expensive against an alternative SMP/milkfat product mix, buyers will substitute and manufacturers will ‘flex’ their production mix. We suspect the likes of European manufacturers have made more WMP in recent months due to excess milk, but also because of some early anticipation of better returns during the NZ off-season. This is hard to substantiate at this point and recent price gains on GDT for near term delivered product suggest it’s not substantial.

However, the WMP curve is very flat at present, suggesting buyers have been in no great rush to pay a premium to hedge future requirements. So while the price gains for WMP witnessed at recent auctions look sustainable, it also suggests the price action during the seasonal lift in NZ supply in July/August will be crucial in determining the 2016/17 outlook (just like last year). Until then, farmers should budget conservatively and only use a milk price around mid-$4/kg MS."