NZ GDT preview: NZX futures point to a 3% gain for wholemilk powder - ANZ

Following the release of the Chinese Caixin services PMI, the next key event for the NZD/USD pair remains the NZ GDT price index, and hence, the ANZ analysts provide a brief preview on what to expect from Fonterra’s fortnightly dairy auction results.

Key Quotes:

“In terms of the next GDT auction, NZX futures are pointing to a 3% gain for wholemilk powder (WMP) and a 2.5% lift in GDT-TWI.

If anything, recent auctions have undershot expectations, with WMP gaining less than expected and other key product prices slipping a touch. In particular, milkfat prices look to be starting to run into valuation challenges despite a very tight demand-supply balance persisting.

Gains in WMP prices at this time of the year are usually predicated on lifting Chinese demand to take advantage of the free-trade window and/or New Zealand supply conditions. Both still look favourable in supporting prices, but a lack of follow-through from Chinese buyers at September auctions could prove challenging.

Chinese participation at recent auctions has been softer than expected, but with import volumes higher than normal. This reflects higher participation earlier in the year, but also solid sales outside the GDT channel. Market talk is Chinese milk production has remained soft and stock levels near historic norms. This suggests import demand should remain solid and in line with seasonal norms.

On the New Zealand supply front expectations are for a 3% to 5% lift in 2016/17, but low carry-over inventory levels provide exporters with flexibility.

Elsewhere New Zealand milkfat pricing looks very favourable versus Europe, which should continue to support demand and is encouraging more butter production. SMP prices remained capped with plentiful Europe/US supply.”