FXStreet (Guatemala) – Analysts at ANZ noted that the dairy prices improved overnight, with WMP up 5.3% and the GDT-TWI lifting 3.6%. Current market expectations are for a further lift at the second auction in December. The key question is whether this enough – combined with other forward looking indicators – for Fonterra to hold their milk price forecast of $4.60/kg MS?

Key Quotes:

“Clearer communication has been provided this season that US$3,000/t for WMP in the first quarter of 2016 is required to deliver the $4.60/kg MS.

However, year-to-date pricing is only indicating something around the $4.00/kg MS mark at present. This highlights the extent of downside risk for farm incomes. At this stage we struggle to see a favourable catalyst that is likely to deliver the US$3,000/t. Instead we expect a range of US$2,500-$2,800/t, which delivers something between $4.25-$4.50/kg MS. The most obvious catalyst for prices to move toward Fonterra’s target is El Nino. Certainty the East Coast of the South Island and bottom of North Island are looking dry at present. From a dairy perspective, a lot of this is under irrigation for now.

Combined with many other regions being in reasonable shape, we see it as a watching risk. But for farm incomes, a summer drought is not a desirable driver for a turnaround in prices. In our opinion it would likely weigh more heavily on moral and 2015/16 bottom-lines. That said, depending on how the currency behaved, it could dramatically improve the outlook for 2016/17.

A more sustainable and positive turnaround in prices requires two of three things changing. A marked slowdown in competitors’ supply (namely Europe), improved demand backdrop (most obvious is China, but needs to be broader based) and an increase in the cost of production (energy and feed prices key). Most are not picking a more sustainable turnaround until mid-2016. But these expectations keep getting kicked down the road.”

Analysts at ANZ noted that the dairy prices improved overnight, with WMP up 5.3% and the GDT-TWI lifting 3.6%. Current market expectations are for a further lift at the second auction in December. The key question is whether this enough – combined with other forward looking indicators – for Fonterra to hold their milk price forecast of $4.60/kg MS?

(Market News Provided by FXstreet)

By FXOpen