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Markets wrap: Futures point to rise in whole milk powder price at GDT auction

Jun 12, 2023

The futures market is betting whole milk powder prices will rise at the Global Dairy Trade auction this week.

The average price for whole milk powder, which has the most impact on what farmers are paid, is expected to rise 1.9% at the overnight auction on Tuesday, while skim milk powder is expected to slip 0.7%, according to futures pricing on the SGX-NZX Dairy Derivatives market.

HighGround Dairy global dairy consultant Stuart Davison said he expects the result to be a bit weaker than the futures are anticipating, with whole milk powder gaining by a smaller amount, and skim milk powder falling by a larger amount as negative macroeconomic conditions impact demand.

"We're not hearing buyers are really chasing a lot of products," he said.

At the last GDT auction two weeks ago the headline Global Dairy Trade price index gained 2.5%, following a 3.2% gain at the previous auction which came after four consecutive declines. The GDT index is sitting 26% below the same time last year.

Davison said the dairy commodity market may have found the bottom and could be range bound for the next few months.

"After the two positive events we've had in the last two auctions, it could be quite likely we'll see another decline," he said.

Fonterra is due to announce its opening milk price forecast for the upcoming 2023/2024 season in the next couple of weeks.

"That will determine the tone for next season for both farmers and probably the commodity market as well," Davison said.

The futures market is anticipating Fonterra will pay farmers $8.45 per kilogram of milk solids next season.

Davison expects Fonterra to open with a wide forecast range given uncertainty in commodity markets.

At the start of the current 2022/2023 season, the co-operative forecast a range of $8.25 to $9.75 per kgMS, with a mid-point of $9 per kgMS. That's since been reduced to $8 to $8.60 per kgMS with a mid-point of $8.30 per kgMS.

As the country's biggest milk processor, Fonterra's milk payment is closely watched and sets the benchmark for other companies.

Dairy products are New Zealand's biggest commodity export.

The benchmark S&P/NZX 50 Index slipped 0.01%, or 1.245 points, to 11,937.60 on Monday. On the broader market 78 stocks rose and 46 fell with $74 million shares traded.

Synlait Milk hit a record low $1.38 during intraday trading, and closed down 2.1% at $1.41.

The milk processor has been out of favour with investors since it warned late last month that it may report a loss in the year to the end of July. It was the company's fourth earnings downgrade and marks a deterioration from last year's profit of $38.5m.

Hobson Wealth Partners director Brad Gordon said investors were concerned about the company's balance sheet. Synlait has said its banks have granted it temporary relief on its debt covenants for this financial year and that it was not considering an equity capital raising.

But Gordon said investors remained concerned that Synlait may have to raise additional equity which would see its shares sold at a discount and dilute existing shareholdings.

"The company has said that they don't need to raise equity and that they've got constructive discussion with their banks going on but equity investors are a little bit more fragile than that," he said. "I think the proof's in the pudding."

Synlait has $180m of retail bonds falling due in December next year, which some analysts say the company will struggle to roll over, requiring it to raise capital by increasing bank debt, selling assets or selling shares. The bonds have the highest yield on the NZX debt market at 13%.

My Food Bag touched a record low 18.5c in intraday trading, but closed up 2.2% at 19c. That a far cry from the company's $1.85 offer price to investors when it listed on the sharemarket in 2021.

The company is finding trading challenging as inflationary pressure on households dent demand for its meal kits.

Analysts expected the company to report a slump in full-year profit on Friday, with Forsyth Barr forecasting a profit of $8.3m and Craigs Investment Partners forecasting $7.9m, down from $20m the previous year.

A slew of listed companies are scheduled to report their earnings over the coming weeks.

New Zealand's weaker economic performance compared with Australia is expected to see the kiwi fall against the aussie this year.

BNZ senior markets strategist Jason Wong said that while the Australian Budget showed a significant improvement in fiscal metrics that will likely see a small surplus this year, the New Zealand government update for the nine months to March showed a deteriorating fiscal position that was tracking much worse than projected, with a likely larger deficit this year.

The contrasting fiscal fortunes between the two countries is notable and sits alongside the contrast in the balance of payments, with Australia enjoying current account surpluses at a time when New Zealand's current account deficit has widened significantly to near 9% of GDP, he said.

Wong noted the more aggressive tightening cycle by the Reserve of New Zealand compared to the Reserve Bank of Australia also set the New Zealand economy on a weaker economic trajectory compared to Australia.

The kiwi was trading at about A93.17 cents at midday on Monday, and BNZ sees it falling to A90c by the end of June and to A89c by the end of the year.

New Zealand's government releases its Budget on Thursday.