Dairy auction prices fall sharply
18 April 2012
FACTS: All price index declines 9.9%.
ANALYSIS: The all price index at the GDT (Fonterra) auction event recorded one of its biggest event-on-event falls since it was established. At the latest fortnightly event (April 17th), the all price index declined by 9.9%. Prices fell for all products on offer across all contract periods. The sharpest declines were for cheddar (-12.1%), rennet casein (-11.9%) and whole milk powder (-11%). At the previous auction, the all price index rose, albeit modestly, breaking a lengthy sequence of declines.
DAVY VIEW: All price indicators (GDT, FAO, CME) have been weak since the last quarter. That the latest GDT recorded a fall is therefore not surprising, but the magnitude of this is a talking point as is the fact that the price of whole milk powder, previously very robust, declined so much. Trade data suggest that global demand for dairy products is firm, which leaves the supply side as the cause of weakness. There is ample supporting evidence for this. Milk output across the main producing regions has been very strong. Due to benign weather and soil conditions (New Zealand), milk output has been running well above its seasonal norm. Even the tail-end of the New Zealand milk production season has seen milk output flusher than usual. But whatever the explanation, product prices are down and milk prices will need to adjust accordingly. The timing of the latest decline coincides with the seasonal increase in Irish milk output. The trend in global prices means that the price adjustment required here now looks be in the order of mid-teens. But such an adjustment would still leave a comfortable margin for producers. Milk prices here tend to adjust in stages; April prices will be the beginning of this process. The fundamentals of the sector remain sound.